Published: February 2022 (4 years ago) in issue Nº 391
Keywords: Suicide, Money lending, Debt, Auroville Village Action Group (AVAG), Microcredit and Maatram
Indebtedness in Auroville
In the last two years, six Aurovilians (two individuals and a family of four), took their lives because of personal issues
including being heavily indebted. Can Auroville do anything to prevent such tragedies from happening in future?
Money lending and borrowing are customary and widespread in Tamil Nadu. For decades, small farmers have been borrowing money from money lenders, because their lands are too small to generate a sufficient income to cover the needs of their families and set money aside for buying seeds and fertilizers for the next season. Small farmers can’t go to banks as they usually don’t have any collateral to pledge against loans. Also, the time required to get a bank loan is a hindrance. During the farming season, farmers often need credit at a very short notice. The road to money lenders is then the only option. Borrowing money has also become quite customary in towns and cities, including in Auroville. The executive of one of Auroville’s units recently investigated how much money in loans his 20 employees had taken, thinking that if the total would be around one lakh, he might be able ‘to do something about it’. The answer was unexpected. “Altogether they owed more than 32 lakhs, so the idea ‘to do something about it’ went out of the window,” he said. Asked why people had taken out such large loans, he learned that it was for building or repairing a house, for the education of a child, to purchase a motorbike, to tide over emergencies such as medical expenses, or for a change of social status. “People desperately want to do better, seeing the lifestyle of others around them or on television.” The breakdown showed that about 40% was borrowed from banks, 25% came from vatti loans, 12% from pawning a personal possession, such as a gold ornament; 13% by participation in chit funds; and another 10% from participating in a micro credit fund.
The vatti loans
Amongst all the loan types, vatti loans are widespread. The practice, however, can easily have vicious consequences as the interest charged is usually far above the legally permitted interest of 12% a year. Vatti loans are special as there is no requirement to repay the main sum at any fixed time. It is common practice that a person borrows, say, Rs 5,000, on condition of paying an interest of Rs 250/month and repaying the main sum ‘whenever possible’. If an interest payment is missed, the amount will be added to the main sum. So if someone skips interest payments for 10 months, the main sum will be increased by 10 x Rs 250 plus the compound interest due on each non-payment. In this way these loans become debt traps. They are called “kandhu vatti”, a Tamil word which translates as usury. Yet, many borrowers, many of them illiterate, are happy to take out these loans. They are unaware that, as in this example, they effectively pay 5% interest per month. Kandhu vatti loans come in many varieties. One is the vaara vatti, the weekly loan, which often attracts more than 25% interest. It is usually taken by daily workers, such as agricultural and construction workers, who do not possess any assured source of income. Then there is the daily vatti, interest to be paid on a daily loan, habitually taken by small entrepreneurs such as vegetable or flower vendors who borrow Rs 1,000 in the morning and have to pay back Rs 1,100 by evening – the 10% interest a day translates to nearly 300% a month, or about 3,600% interest a year. This daily vatti also happens when a poor person needs some food from the local shop but cannot pay; food is then given on the condition that the money is repaid that same evening, plus interest. Lastly, there is hourly vatti, an interest calculated on an hourly basis. The consequences of a continuous repayment default can become unbearable for the borrowers. Often, they get harassed, suffer verbal abuse or even violence, and are asked for surety, like having to surrender their land documents or possessions such as vehicles. These are then used to coerce them to repay the loans plus interests on the lenders’ terms, failing which they are taken over. The borrower, seeing no way out, alone, or sometimes with his entire family, commits suicide. In 2003, after a series of suicides linked to usurious debt, the state enacted the Tamil Nadu Prohibition of Charging Exorbitant Interest Act to safeguard borrowers from harassment and violence by moneylenders. The law, along with the Moneylenders Act, which prohibits charging of interest above 12%, was meant to put an end to usurious lending by treating usury as a criminal offence and imposing hefty punishments on the harasser, such as imprisonment and fines. Yet, these laws are known to have had little effect and the practice continues unabated. In Auroville, some Aurovilians have admitted to giving loans at a rate of at least 2% a month to fellow Aurovilians and Auroville employees.
The chit funds
Participation in a chit fund is another way to get quick access to money and is equally widespread. A chit fund has a fixed number of participants, each of whom agrees to pay every week or every month a certain sum to the fund for a fixed period. The chit is the full amount collected each month. So if the fund has 10 people, the duration of the fund will be 10 months. If each person pays Rs 5,000 a month, a chit is Rs 50,000. A participant can receive the chit at any time during the term of the fund, even though the participant has not yet paid his or her full share. To receive the chit, there is an auction. The participants ‘bid’ to get the chit, and that bidding goes in the form of agreeing to get less than the full chit of Rs 50,000, say Rs 40,000 or Rs 30,000, so the participant loses Rs 10,000 or Rs 20,000. That amount is then added to the chit fund and is later equally divided between all participants, including the person who received the reduced chit. When does someone agree to forfeit the full sum? This happens when there is a real emergency, like a hospital treatment, educational expenses, or family celebrations, such as a marriage. But there are also cases where a participant deliberately takes the chit for a lesser amount to lend out that money as a vatti loan and so generate more income than if he or she had received the full chit. There are also people who join a fund purely for making money. They have no need for a chit and can wait till the end of the chit fund period, and then get an extra income from the money left over in the fund by the participants who had agreed to take less than their full share. Some even join a chit fund knowing that some other participants will soon have a real need and therefore are likely to agree to take out a lesser amount. Then they’ll get their Rs 50,000 + all the benefits from the auctions. In this way, they can easily make extra money. The flaw of the auction system is that people with true needs will come out with less money than they’ve put in, while those who have no need, such as a money lender who only joins to get more capital for his next usurious loans, will benefit. The foreman (the organizer) of the chit fund is in a special position. There are many ways in which s/he gets a cut. It can be in the form of a percentage or a fixed sum. S/he can also be entitled to receive the first chit for the full amount, and is then supposed to keep that money aside, in case someone doesn’t pay up. The foreman is also responsible for maintaining the accounts, collecting all the monthly installments and keeping them properly – usually in a home safe or cupboard – and not investing any of this money for personal gain, e.g. by giving out vatti loans. But the temptation to go for the quick extra buck is high; some foremen even organize second auctions for the money left over when someone takes out less than the full chit. In those cases, the maths gets very complicated and there often are fights. And if a foreman makes a wrong decision, and loses the money entrusted to him/her, a suicide may follow easily. This appears to have been the case with the Auroville family. To prevent abuse and regulate chit funds, in 1982 the central government passed the Chit Funds Act. This act declares as illegal any chit fund that is not sanctioned or registered and puts conditions on the operation of approved chit funds, such as that a foreman has to deposit the chit money with an official bank. In the Auroville area, this does not happen. The manager of the State Bank of India in Kuilapalayam, one of the most prominent banks in the area, stated that his bank maintains no chit fund accounts. All chit funds in the Auroville area are unregistered, and as such, illegal.
Microcredits
The Auroville Village Action Group (AVAG) has successfully managed to tackle the problems of vatti loans and chit funds by setting up a microcredit scheme under its corpus fund. This has proven to be an excellent way to improve the lives of the rural poor. Loans are given for housing, repayment of usurious loans, social functions, agriculture, education, small business, and medical costs. AVAG has also been stimulating its women Self-Help Groups (SHGs) to start their own micro-financing activities. The members club together their savings and jointly take all decisions, such as the interest to be paid on deposits, which member to give loans to, and what the conditions for loan repayment are. Monitoring is done by AVAG, which keeps track of all the financial transactions of the SHGs. With the help of this monitoring, the microfinance activities have been very successful, with a loan repayment rate of almost 100%. AVAG also assists participants of SHGs to get bank loans for agriculture, businesses, housing, education, and other critical needs. The work of AVAG has resulted in a dramatic reduction of the number of suicides due to indebtedness: from 8-10 a year before the schemes started, to less than two in the recent years. Yet, AVAG’s work it is still not sufficiently known. One of its executives expressed her frustration that people who could have been member of a women’s SHG, still take vatti loans, as they are not aware of the micro credits being available.
The situation of Auroville’s employees
The micro credits and assistance from AVAG are only available for people living in the surrounding villages who are members of a Self-Help Group. Many of Auroville’s employees do not qualify. But those working in Auroville units are either enrolled in the Employees’ Provident Fund (EPF) [if the unit employs 20 people or more, eds] or in Auroville’s Small Employees Welfare Administration scheme, SEWA. Under these schemes, an employee has to pay a certain contribution towards the scheme and an equal contribution is paid by the employer. On retirement, at attaining 55 years, the employee gets a lump sum amount consisting of the contributions of the employer, the employee and the interest on both. Though these schemes are meant to take care of an employee’s post-retirement needs, both permit access to the savings during the course of employment. Such withdrawals, which are treated as ‘advances’ and not loans, are allowed only under specific situations – buying a house, repaying a home loan, medical needs, education or marriage of children. The amount that can be taken as an advance will depend on the specific situation, the number of years of service, etc. As the advance is not a loan, no interest is due and no repayment is necessary. However, as an advance diminishes the lump sum available on retirement, it is advisable that the participant voluntarily repays the advance. Another possibility would be that the employees in a unit start their own micro credit scheme, similar to what is being done by the SHGs, and accept the oversight of the employer. The advantage of doing a micro credit scheme under the umbrella of a workplace would be that the salary and saved funds under EPF or SEWA could serve as insurance for the loan repayment. But no Auroville unit has as yet implemented such a scheme.
The Aurovilians
Aurovilians do not participate in social welfare schemes such as the EPF or SEWA as those schemes are for employees only. Many Aurovilians also lack old-age financial security. This might get resolved when the Silver Fund, a pension scheme for long-term Auroville residents over the age of 70, takes effect. [Its modalities are still being studied by the FAMC, Auroville’s Funds and Assets Management Committee – the study was interrupted because of COVID, eds.]. But how can Aurovilians cover immediate needs that cannot be paid from their monthly maintenance? How can Auroville stop Aurovilians from taking vatti loans or participating in chit funds? It is not well-known that Aurovilians who work full-time for Auroville can get financial support from Auroville, for which the FAMC has set up a financial support group. Financial support, to a maximum of Rs 30,000, may be given for the purchase of basic household goods, to cover costs of education of one’s children, to cover expenses related to the treatment of health issues of oneself and one’s immediate family members (parents, children, partner), to cover emergency travel expenses, and to purchase a cycle or electric vehicle for oneself or for one’s partner or child. The support group will assess the applicant’s ability to repay the support given and fix the terms of repayment. If considered necessary, support may be given on condition that one or more persons or an Auroville unit guarantee the repayment. Generally, repayment is to be done within 12 months from the date the support has been provided
Psychological support and awareness creation
So there are ways for an Aurovilian or an Auroville employee to access funds without having to take a vatti loan or participate in a chit fund. But awareness needs to be created, and those who are trapped in the clutch of money lenders need help. Yatra Srinivassan, a Kuilapalayam-born film director who has produced many educational films and street plays on social, health and environmental issues, has agreed to make a film on the dangers and illegality of vatti loans and chit funds, if Auroville can cover the costs, estimated at Rs 2 lakhs (US$ 2,700). Mattram, Auroville’s centre for psychological support, continues to be available for counselling Aurovilians and Auroville employees who have financial problems and suffer harassment and psychological trauma. It is a beginning.