Land Mortgage Banks

By THE HON'BLE V. RAMADAS PANTULU

A well-organised system of rural credit is the greatest economic need of India. The central problem of our rural economics may be summed up in one word. The chronic indebtedness and poverty of the ryot leads to low agricultural production, and low agricultural production in its turn leads to increased indebtedness and poverty. It is indeed moving in a vicious circle. Low agricultural production carries with it three economic implications. First of all, it means that the quantity of the produce raised by the nation, per head of the population, is less than what is required for the economic needs of the people. It is an admitted fact that vast masses of our people are under-fed and meagerly-clad, that many of them go without a full-meal a day and many others without two meals. Secondly, low production means that the unit of produce got from land in India is less than the unit of produce obtained from an equal area of land in other countries.¹ Thirdly, low production also signifies inferior quality of the products and the consequent disadvantages they suffer from in the world's markets in Com- petition with those of other countries. Indian products not only fetch unremunerative prices but are sometimes driven out of those markets. The extent of rural indebtedness

and peasants' poverty have been the subjects of numerous piece meal investigations by official and nonofficial agencies, but so far as I know, no comprehensive survey of it was conducted by any agency. On a rough estimate it is believed that the rural indebtedness of British India (excluding the States) is six hundred crores of rupees and that of Madras Presidency ninety crores. As for the causes of indebtedness, the enquiry made by the Committee appointed to investigate into the causes of the agrarian riots which occurred in the Deccan in 1875 is, I believe, fuller and more reliable than other enquiries. The findings of the Committee were not merely confined to the immediate causes of the riots but covered a wide economic ground. Sir Frederic Nicholson who examined the causes of agricultural indebtedness in Madras Presidency pointed out that the findings of the Deccan Committee were of general applicability to India, notwithstanding the fact that the inquiries of the Committee were confined to a comparatively small area. It may be that the causes enumerated by the Committee will not be found to operate in the same measure and to the same degree in all Provinces but will be found to be at work more or less allover India, some more predominantly in some Provinces, and others in some other Provinces. The findings of the Committee regarding rural indebtedness are thus summarised by Sir Nicholson himself: (I) Poverty with unproductive soil, precarious climate, and irregularity of income (2) ignorance and improvidence (3) extravagance (4) ancestral debt (5) expansion of credit (6) increase of population without corresponding increase of returns (7) facilities for borrowing owing to influence of money-lenders (8) the Limitation Laws, as leading to renewals on usurious terms including compound interest (9) revenue system of fixed demand. It seems to me that the findings of the Committee are defective at least in one material particular in so far as they omit to mention a very potent cause which appears to have contributed in no small measure to the reduction in the peasants' resources; it is the destruction of Cottage Industries and the consequent loss of income to the ryot by a subsidiary occupation in the off season. Excessive fragmentation of holdings which renders agricultural industry uneconomic and certain other factors are also not mentioned in the findings of the Commission but they may perhaps be brought under one or other of the heads summarised above.

It is true that the indebtedness of the ryot is not a recent evil. It has been an age-long problem. But there are two recent features of it which are causing alarm and anxiety. It is growing in volume rapidly. It is also becoming more and more unproductive. That rural indebtedness has grown considerably in the last 4 or 5 decades is conceded by no less an official authority than Sir Edward Maclagan. In his brief but illuminating conspectus of the situation as it stood in 1911, he observed as follows ;- "It has long been recognised that indebtedness is no new thing in India. The writings of Murno, Elphinstone and others make it clear that there was much debt even at the beginning of our rule. But it is also acknowledged that the indebtedness has risen considerably during our rule and more especially in the last half a century. The reports recorded from time to time and the evidence of annual sale and mortgage data show clearly there has been a very considerable increase of debt during the last half a century." Indebtedness may not in itself be an evil. Debt when productive is as helpful to an agriculturists as capital advanced is to an industrialist. If the growing debt is also becoming increasingly unproductive, as it unquestionably is, then there is real cause for grave anxiety. The agriculturist himself cannot be wholly acquitted of blame for this unfortunate position. It is useless to deny that the agricultural population have had their share of the benefits which have accrued to the country at large by the improvement of communications, by big irrigation schemes, by the opening up of trade and other facilities which developed in the last fifty years. These factors have contributed to impart enhanced values to land as well as to agricultural raw products. The system of land settlement and record of rights, defective as it is, has invested individual ownership in land with an authoritative estimate of value and therefore agricultural land has become a coveted security and in consequence enhanced the borrowing power of the ryot. So the increase in the volume of debt is partly to be accounted for by the facilities these factors have contributed to the borrowing capacity of the ryot. But the tragedy of the situation is that these advantages are not availed of by the ryot to improve his economic condition; on the other hand he is saddled with a heavier load of unproductive debt. At present the ryot is actually weighed down and is groaning under the burden which he carries on his either shoulder, chronic indebtedness and traditional illiteracy. The consequence is that the rural population now lives in an atmosphere of utter depression. Unless the vicious course of rural unproductive indebtedness is arrested, it is bound to lead to economic paralysis if not to economic death.

HOW TO REDEEM AGRICULTURAL DEBT

What are the remedies for this grave evil? Several have been suggested and some are being tried. Leaving aside such drastic remedies as the overhauling of the land revenue system, radically altering the laws of inheritance and partition, emigration and birth-control to relieve pressure on the soil and the like, the remedies which can be attempted and are likely to be fruitful may be grouped under five heads; (I) removing from the peasant, as far as possible, allcauses for uneconomic borrowings and inducing him to confine his wants, within practicable limits, to legitimate objects; (2) adoption of measures to ,ensure for the peasant fair treatment in the determination and recovery of debts claimed against him, by the improvement in the provisions of the processual and contractual laws (3) adoption of measures calculated to prevent the peasant from experiencing the more serious consequences of indebtedness such as the loss of land or the permanent impairment of capital by restricting the power of alienation over the land (4) relieving pressure on the land by promoting schemes for the reclamation of fresh land and creation of subsidiary occupation; and (5) devising means by which the peasant may obtain such money as he really wants for economic objects on easier terms than are now available and with less disastrous results; in other words, measures undertaken with the object of providing and maintaining credit or redeeming debt. When further analysed, all these remedies centre themselves round one essential factor, the supply of capital and credit on a judicious, controlled and regulated system to the agriculturist. Without providing for capital and credit it is perfectly useless to talk of improved methods of agriculture, making agriculture a paying industry, organising the peasants, and so forth. It is a mistake to suppose that agriculture yields a quick annual return and is therefore a self-supporting industry which can finance itself. Mr. Wolff is absolutely right when he says that "under pressure of advancing times, agriculture has long since become far from the easy, self-rewarding, occupation which it is understood to have once been, a business of money and enterprise like all other business, having the same tasks set to it but not the same means at its disposal wherewith to accomplish the task." This statement is equally true of India, although Mr. Wolff was speaking about other countries.

RURAL CREDIT AND AGENCIES TO DISPENSE IT: LAND MORTGAGE BANKS

Credit granted for the promotion of any line of agriculture is called Rural Credit and is of two varieties, the short term credit and the long term credit. Of late, intermediate credit, in between those two varieties, is coming into great prominence, specially since the passing of the Intermediate Farm Loan Act of 1923 to supplant the Federal Farm Loan Act of 1916 in America. For our present purposes intermediate loans may be classed with short term credit. Short term credit is, generally speaking, working capital of agricultural industry to meet the current needs of the husbandman, such as cultivation expenses, cost of small repairs, purchase of seeds and manures and so forth. This form of credit should be supplied to him on the security of his current and future income from land over a short period of 2 or 3 years and on personal guarantee and surety-ship. The Co-operative Credit Societies which are established on the German model of Raiffeison type with mutual guarantee and unlimited liability of the members are the best agencies for liberating this form of financial accommodation to the agriculturist. This variety of short term credit and the village primary societies which dispense them are not suited for satisfying the larger needs of the cultivator for purchasing land, effecting permanent improvements to his holding, converting uneconomic holdings into more economic ones by sinking costly wells or installing valuable machinery, discharging prior debts anti so forth. Needs of this kind could be satisfied only by long term credit. This form of credit is advanced on the security of the ryots' permanent wealth, namely, his lands and houses, contra-distinguished from his temporary wealth, his annual harvest. So in every country two types of institutions are installed to work side by side to satisfy both kinds of credit needs of the ryot. In some parts of India, especially in Madras, the slogan of the rural credit society being utilised to serve all the credit needs of a member has gained currency and the 10 or 12 year land mortgage loans have become a feature of these Madras societies. They are encouraged. In some districts they form 90 % of the total loans and on the average 50 % of the loans are on land mortgages. This combination of the short term (personal security) finance with long term (real security) finance, in which some orthodox co-operators in Madras have pathetic faith, is responsible for a great deal of dislocation in the financial adjustments of the movement. The indisputable fact is that the long term credit cannot be rationally dispensed on business principles by the rural credit societies².

The essential features of this variety of loan are, firstly, the sum advanced to the ryot should be sufficiently large to effectively start him on his business by placing in his hands funds required not only to lift his old debts but also to leave a surplus to serve as capital wherewith to improve the land so as to ensure increased returns. Persons who are mostly benefitted by this form of credit are those who absorb comparatively large loans and who can offer substantial security. Persons with small uneconomic holdings and slender security to offer, and landless tenants, cannot be helped with this kind of accommodation. In countries whose holdings are large and yield large returns and profits, even joint-stock banks finance landholding classes on security of land and therefore Co-operative credit has no hold on countries like England and the United States of America. But in countries like India with small and scattered holdings which leave precarious margins of profit, joint-stock banks will not advance money on the security of land. The obstacles to such lending are the meagre value of the collateral securities offered, the dissipation of the banks' resources over a wide area among numerous borrowers, and the need to establish close control and watch over the activities of the borrower, without which the loans and their recovery will not be safe. Secondly, the loan should be made repayable from the margin of profits on his holdings, without putting the ryot to the necessity of borrowing from another source to discharge it, or selling his holding to raise the money to meet the creditors' demand. In other words, the long-term loan has to be spread over a long term of years and recovered in small driblets. The maximum time allowed for repaying such loans is 30 years in Finland, 33 years in Chille, 36½ years in Newzealand, 42 years in Australia, 50 years in Italy and Japan, 54½ years in Austria,55½ years in Switzerland, 60 years in Denmark, 63 years in Hungary, 68½ years in Ireland and 75 years in France. No individual money-lender or joint-stock companies can afford to "tie up their capital and take it in driblets as it is refunded bit by bit out of the earnings or savings from the soil during a long series of years." It is therefore only a special type of institutions known as Land Credit Institutions or Land Mortgage Banks, that can embark upon this kind of Banking.

TYPES OF LAND MORTGAGE BANKS

The right way to study the characteristic features of Land Mortgage Banks is to study the institutions themselves as they are now functioning in various countries allover the world. How far any particular type of Land Bank can be adapted to the conditions of India can be accurately judged only by that process. Full and accurate accounts of their working are available³. When we deal with Co-operative organisations or Land Credit Associations it is well to remember one fact, namely, that the organisations have sprung up more as practical solutions of peculiar local difficulties and were not conceived at their inception as embodiments of any definite theory of economic organisation. But, for facility of study, the process is often reversed and the common aspects and principles which may be extracted from the institutional features are first expounded and tht: institutions themselves are cited as illustrations of those principles. However helpful this method might be for purposes of academic study, it should not lead us into the mistaken path of selecting one or other, type of such institutions on a priori grounds of its inherent merits without regard to the peculiar needs of Indian rural economy and social and political conditions. A detailed description of the various kinds of Land Mortgage Banks cannot be attempted here. They may be classified in different ways on different principles. For instance, they may be divided into public, semi-public and private. Public Land Banks are owned and operated by the State. They are practically Departments of Government. They own no share capital. They obtain the funds required for granting loans either by appropriation (budget grants) or by issue of debentures guaranteed by the State. The profits are either devoted to some pub1ic purpose or utilised for extension of business. Semi-public Land Credit associations arc those in which the State is a part owner and participates in the management or control or assumes a responsibility of some sort. Private Land Banks (so also semi-public ones) may be associations of borrowers or of lenders (that is, Joint Stock Companies) who carryon land mortgage credit operations with the minimum of State interference. When they are Joint Stock Companies, their aim is to make profits and declare as large a dividend as possible. When they are associations of borrowers, "they have no capital stock or lucrative object, and if they happen to accumulate a surplus from earnings or savings, it belongs to the members and is distributed in rebates of principal and interest in proportion to the amounts paid up on their loans." Another basis on which Land Credit Associations may be classified is this: they may be co-operative, non-co-operative, or quasi-co-operative. The co-operative type is represented by the Prussian Farm Mortgage Mutual Credit Associations, which are associations of borrowers. They have no capital. They aim at keeping interest low and do not aim at profit. Each member pays a small entrance fee to meet the necessary expenses, initial cost of land valuations and other incidental charges. Credit is created by the issue of mortgage bonds bearing interest and made payable to bearer and these bonds are regarded as perfect types of secure investment and are quoted on the Exchanges throughout the German Empire. The attempt to co-ordinate the activities of the local landschaftens through a central landschaften made in 1873 did not prove successful.⁴

The Federal Farm Loan Banks of the United States of America are also illustrative of the co-operative type.⁵ The non-co-operative type is represented by the numerous commercial and Joint Stock Land Mortgage Banks working all over the Continent of Europe. They work for profits and declare dividends, but the State exercises control over their operations in order to ensure that they do not work hardship to borrowers and that they fulfil their obligations to their investors or debenture holders. They are mostly based on the French model of Credit Fancier de France. The Agricultural Bank of Egypt is also illustrative of the non-co-operative commercial type.

In between these two types, there are institutions which combine co-operative and commercial ideals in varying proportions and so quasi-co-operative in character. Associations with membership of borrowers and non-borrowers, operating over fairly large areas and formed with share capital and on limited liability basis, but in which each member has a single vote irrespective of his share capital and the dividend on share capital is fixed at a low minimum, may be taken as illustrations of quasi-co-operative type. The Hungarian and Mortgage Institute for large land owners and the National Small Holdings Land Mortgage Institutes are examples of quasi-co-operative land banks.

LAND MORTGAGE BANK THAT SUITS INDIA

The question which merits our serious consideration is, what is the form of Land Mortgage Bank which suits India best? So far as relief to small agriculturists and owners of small holdings is concerned, it is, I believe, now fairly well accepted that land mortgage banks on a quasi-co-operative basis will be most efficacious. I call them quasi-co-operative, because no scheme which has yet been propounded, puts them on a fully co-operative basis, although there are substantial elements of the co-operative ideals in all of them.⁶ They are conceived as limited liability associations of borrowers with a few non-borrowing individuals thrown in for attracting the talent and organising capacity needed to make the management efficient. The number of shares owned by the members are limited, the rule of 'one man, one vote' irrespective of the share capital subscribed by them is generally observed, dividends are restricted to a low figure and the goal of gradual elimination of non-borrowers is kept in view to import a co-operative spirit into them. The fact however remains that the work of a Mortgage Bank "is recognised on all hands to be extremely impersonal and as devoid of the human element as possible", and that the human and personal elements which are the chief characteristics of the Raifiesson type of societies cannot be infused into them in any appreciable measure. While mutual knowledge of, and control over, each other among members is the insistent feature of the unlimited liability credit society, the insistence in the case of a land mortgage credit limited liability society is on the capacity and business habits of the directorate in order to ensure sound valuation of security, careful investigation of titles, and correct assessment of borrowers' credit and efficient management of affairs⁷.

So far as I know, the conditions of the various provinces in India do not so materially vary as to require distinct types of Land Mortgage Banks for the several provinces. A t one time I was of that view. But I find on further investigation that a single model will suit the whole of India-of course with variations in details of management and working dictated by local conditions. In the matter of supply of long term credit, the needs and economic conditions of agriculturists in the different provinces are almost the same. There are no doubt complications arising from the incidents of land tenures prevailing in the different provinces; in some parts, as in the ryotwari and permanently settled tracts of the Madras Presidency, ryots have heritable and transferable rights in their occupancy holdings, while the varum-pattadars of Malabar have no rights whatever in the land. In between these two extremes, there are various tenancies with qualified occupancy and limited rights of transfer subject to certain charges as in Bengal and United Provinces. But these complications only affect the nature and value of the security that is offered, but do not affect the features of the long term credit or the kind of institution that is required to dispense it. The poor ryots with small holdings cannot afford to secure credit except through organisations based on mutual association and guarantee, and the Co-operative Land Mortgage Bank is a legitimate application of that principle. The funds of such a bank can best be raised only on the collective guarantee of the properties mortgaged by the members. It follows that the members who thus created the credit should have a voice in the management of their bank on well-recognised principles of democratically controlled credit of co-operative institutions. As a productive organisation, agriculture will remain for a long time to come in India an individual effort or a family effort at best. But for specific purposes, associated efforts of agriculturists can be, and ought to be, organised. Credit is unquestionably one of those special purposes which will be productive of the best results, and results so far achieved are encouraging. Perhaps purchase of agricultural requirements and marketing are other special purposes where agricultural organisations on co-operative basis will help the economic uplift of the ryots. The schemes recommended for the Punjab, Madras and Bombay, and the States of Baroda and Mysore are of the co-operative type. In other provinces, there is little activity in the field of Land Mortgage Banking.

DEFECT OF THE SCHEMES-WANT OF CENTRAL ORGANISATION

The chief defect of the schemes hitherto set on foot consists in the weak position which the small primary Mortgage Banks occupy in relation to the outside money-market. They are unable to attract money by the sale of their debentures. The causes which operate against ordinary rural credit societies attracting deposits operate also in the case of these primary mortgage credit associations. The depositors in the one case and investors in the other, look to the efficiency of the management of the society and to the certainty of the punctual payment of interest and the repayment of the deposit or investment on due dates. The way in which existing credit societies are managed does not tend to instil confidence into the minds of the would-be purchasers of debentures to be floated by the primary Mortgage Banks. It is therefore perfectly useless to persist in the present schemes, for they will not make any headway in the near future. I still adhere to the view I expressed in my evidence before the Royal Commission on Agriculture that the so-called Land Mortgage Banks now started are a mere eyewash or apology for a real scheme of Land Mortgage Banking. The solution of the problem lies in the same direction that we took to promote ordinary rural credit, namely, the founding of the Central Mortgage Associations to finance these primary Land Banks, just as we started Central Banks to finance rural credit societies which were unable to finance, themselves. Whether there should be more than one such central institution in a province is a matter of detail. Nevertheless here also we may profit by our past history. The Central Bank at Madras (the Madras Central Urban Bank) was first started to finance rural societies directly, and as business grew in volume, Central Banks were multiplied in the districts and the one at Madras became the apex bank, so to speak. Similarly we may start with establishing central financing institutions at the headquarters of the provinces to float debentures and finance the primary Land Mortgage Banks. It is gratifying to note that this scheme found favour with the All- India Conference of Registrars of Co-operative Societies held at Bombay in 1926. A portion of the resolution passed by that conference is reproduced below :-

(I) Mortgage banks based on co-operative principles are desirable in many parts of India. No transaction should be undertaken which is not economically profitable to the borrower.

(2) Objects.. The principal objects should be:

(a) The redemption of the land and houses of agriculturists.
(b) The improvement of lands and methods of cultivation and the building of houses of agriculturists.
(c) The liquidation of old debts, and,
(d) The purchase of land in special cases to be prescribed in the bye-laws. (The caution is evidently to prevent land speculation and indiscriminate borrowing to buy land).

(3) Area and management. The area of operations should be the smallest unit consistent with competent management. The impost1ion of liability on village credit societies or the confinement of mortgage loans to members of such societies are not recommended, but the Bank should consult the village societies in the case of all loans to members of such a society. Punctuality in repayment should be rigidly enforced in Mortgage Banks.

(4) Finance. A reasonable total of share money should be held by each Bank in order to reassuring the investing public.

In provinces in which the property can be sold on foreclosure, no loan should exceed half the value of the mortgaged properties.

No excess liability is required beyond the amount actually borrowed by a member plus his share money. If no excess liability is imposed, the share money of a borrower should not be less than 1/20 of his loan.

The minimum loan should be such as to repay the costs of the transaction to the Bank. Each Bank should prescribe in its bye-laws a maximum loan from time to time according to its financial position.

Debentures should be issued by a central financing body in each province rather than by separate Mortgage Banks.

The resolution proceeds to state the help which the Government and the Imperial Bank should render.

The Committee appointed by the XV Madras Provincial Co-operative Conference and the Townsend Committee have both advocated a Central Land Mortgage Bank. Mr. Wolff⁸ in reviewing the Townsend Committee's Report in a recent communication to the Madras Registrar expressed his concurrence in that proposal. He says, "I see that, the same as else where, you are busy on schemes for introducing co-operative mortgage credit, unquestionably a great desideratum. Strickland's scheme will not do at all. None of the schemes thus far put to the test appear to have proved successful. I myself know too little about practical conditions in India to be able to judge at all with confidence. Lallubhai Samaladas writes to me that my difficulty about title does not really stand seriously in the way. Unquestionably you will have to begin with some fairy assisting at the outset wish a guarantee and I should say an organisation for placing the bonds methodically. But, so far as I can judge, I should prefer to see that good fairy taking the shape of some well-meaning association or company other than the Government, some society that could take up the matter in a business- like way and qualified to organise the sale of bonds according to business us ages. The matter is of distinct importance and I hope that in the attempt to square the circle you may be successful."

The substance of these schemes is that a Central Land Mortgage Bank with primary Land Mortgage Banks, other co-operative societies, and individuals as shareholding members, should be formed to raise credit by floating debentures to finance the primary Land Mortgage Banks. Individuals and the other co-operative societies cannot borrow. The Central Land Mortgage Bank alone should float debentures. If more than one agency were to float debentures, then there will be conflict between them. The rates of interest on debentures, their market quotations and their negotiability will vary with the agency floating them and the local conditions prevailing in the neighbourhood of such agency. It will also lead to competition among the several banks in marketing their bonds. The debentures will be floated on the strength of the mortgages taken by the primary Land Mortgage Banks from their members and transferred to the Central Land Mortgage Bank. The value of such debentures shall not exceed 50% of the value of the properties mortgaged by the members of the primary banks or the amount of the total loans advanced by the primary banks, whichever is less. Interest on debentures should not exceed 6%, that on loans to primary banks 7%, and that on loans to members of the primary banks 8%. The Central Mortgage Bank's borrowing power would be 25 times the paid-up share capital and reserve fund. The duration of the debentures will be 30 years and they will be redeemable on 6 months' notice.

The Provincial Co-operative Bank might perhaps be able to do this work and save us the trouble and expense and risks involved in evolving a new institution which will take time to establish its credit and whose success will depend upon the kind of management it secures. Official opinion is however against this idea. Three considerations weighed with me in yielding to the objections raised against the Provincial Bank doing it. Firstly, the Provincial Co-operative Bank, (the Madras Central Urban Bank) does not by its very constitution possess any control and is not in a position to exercise any regulating authority over the primary Land Mortgage Banks: without such control and regulation the finance will not be safe. Secondly, the Provincial Bank has by a process of evolution become an apex bank so far as the existing credit institutions are concerned, and deals only with Central Banks. The establishment of direct relations between it and the primary Land Mortgage Banks will involve a radical revision of its constitution. Thirdly, there are certain risks involved in mixing up in the Provincial Bank the two kinds of credit, ordinary credit and land mortgage credit, which are to be ultimately dispensed by two types of institutions which differ widely in their constitution, tradition, outlook and resources. But none of these objections can weigh against the Provincial Bank carrying on the work as the Managing Agents of the Central Land Mortgage Bank and the arrangement has undoubted advantages to the Land Mortgage Banks, for it will not only reduce the cost of working the central agency and release greater margin of working expenses for the primary banks, but will also give greater credit and liquidity to the debentures than if they were floated by a new agency not known to the money market.

MANAGEMENT AND COST OF WORKING OF A LAND MORTGAGE BANK

The success of the land credit institutions depends largely upon the efficiency with which land is valuated, titles are investigated and the credit of borrowers is assessed. Valuation and inspection involve payment for expert services and legal advice. Inefficient management is beset with risks and dangers not only to the members but also to investors. If debentures are issued without care and except under proper control, the farmers' credit would be ruined very soon and the investing public will be exposed to grave risks. If a bank issues debentures of the value of a lakh of rupees ed by security of land worth Rs. 50,000, the position. is, we have a real value of Rs. 50,000 and a paper value of Rs. 50,000 which is worthless. The one problem connected with bonds and debentures is to make them more and more liquid that is, create the greatest possible facilities to convert them into cash assets in cases of urgency. This aim is secured mainly by creating confidence in the value and stability of the real wealth or security on which they are based. All these objects cannot be secured without due provision for efficient internal management and strict supervision. At the same time the management should not be made very costly, for the cost will ultimately fall on the borrower, and any system of levying commission or other incidental expenses for contracting the loans or for renewing them should be discountenanced. The duty of the office establishment mainly relates to the duty of issuing loans and effecting recoveries and maintenance of accounts. The working cost will depend upon the volume of transactions and other circumstances. Mr. Strickland fixed it at 1 to 2% of the total transactions. A Committee of the Madras Provincial Co-operative Union fixed it at 3%. This is clearly an excessive estimate. It must be kept down below 2%, so as not to raise the lending rate above 8%. On this basis, I calculate that primary banks with less than 4 lakhs annual transactions cannot make both ends meet if properly staffed.

SUMMARY OF THE SCHEME

From the foregoing discussions of principles and precedents, I believe the following essential features of the scheme emerge and hope that they will be accepted, to put an end to an interminable controversy which resulted in procrastination and prevented definite action being taken hitherto :-

(i) A scheme of land mortgage banks based on co-operative principles is required for many parts of India and can be made to conform to a single type, with modifications in details of working according to local conditions.

(ii) The existing rural credit societies should not be utilised to dispense long term land mortgage credit, nor should such credit through Land Mortgage Banks be restricted to members of rural societies.

(iii) There should be a central financing Land Mortgage Bank for each province to raise credit by debentures and to finance the primary Land Mortgage Banks.

(iv) The Primary Land Mortgage Banks should be constituted with share capital proportioned to borrowings and on a limited liability basis⁹.

(v) Loans should not exceed 50% of the value of the property mortgaged¹⁰. The minimum loan should be such as to repay the costs of the transaction and the maximum must be fixed by each bank in its bye-laws from time to time according to its financial position.

(vi) The cost of management should be kept, below 2% so that the loans may not carry interest exceeding 8% as far as possible. The area of operation should not be too small where a costly establishment is maintained.

(vii) The maximum period for repayment of loan must be 20 to 30 years according to local conditions, according to a convenient system of instalents¹¹.

(viii) The State should help the scheme by subscribing for debentures, guaranteeing interest on them for sometime, contributing in the initial stages towards the cost of valuation of lands, by making land mortgage debentures trustee securities, by exempting the Land Mortgage Banks from income tax, super tax, stamp duty, registration fees and the, like, and by investing these banks with power to foreclose.

GOVERNMENT'S ATTITUDE TOWARDS LAND MORTGAGE BANKS

It has to be painfully admitted that the attitude of the Government of India as well as of the local Governments has hitherto been one of indifference, if not of apathy to Land Mortgage Banks. The Government of India takes convenient shelter under the plea that the subject is a provincial one in the transferred departments. All that Sir Mahammad Habibulla could say in the debate raised by me in the Council of State regarding Land Mortgage Banks was that he referred the resolution passed by the ninth Conference of Registrars on the subject in 1926 to the local Governments and all that could be done with any resolution that the Council might pass, was a mere repetition of the same process. I do not complain in the least of want of either sympathy or understanding on Sir Muhammed Habibullah's part. He is a genuine friend of the agriculturist. But I do complain of indifference, nay even of apathy, on the part of the Government of India and Local Governments to the' problem of Land Mortgage Banks. I cannot but regret also the lack of enthusiasm in the matter on the part of co-operators in the province. I have not read a single full-dress debate in any Provincial Council on the straight issue of establishing Land Mortgage Banks to relieve unproductive agricultural indebtedness, especially having regard to the fact that the Government of India definitely shifted the burden on to the shoulders of the Provincial Governments. The time has perhaps come for co-operators to run their own candidates to the several legislatures in the country to constantly keep the co-operative problems before the executive and the Councils. In any country the State's responsibility to safeguard the economic interests of the agriculturist is obvious; in India it is more imperative where land is the chief national asset, agriculture the predominant industry, and land revenue the main source of the State's income. The State is bound to preserve land which is the national asset in an efficient condition of economic productivity for the benefit of future generations. There are grave dangers which the State will incur if the condition of the peasantry becomes intolerable and by the growth of a landless proletariat. I cannot do better than quote the note of warning sounded by Sir Edward Maclagan in this connection.

" It is necessary for Government, not only in the interests of the people but also in its own interests, to see that the evil does not spread too far and that its consequences are mitigated as much as possible. It must, in the first place, be remembered that if a large body of people is oppressed by a load of debt, they must necessarily become dispirited and discontented not only with the load of the debt itself, but also with the classes to whom the severity of the debt is attributed. It is further impossible for the Government to view with equanimity any large increase in wasteful and unnecessary expenditure by which the balance at the disposal of the peasant for improving agriculture is seriously reduced. There are also certain consequences of indebtedness such as mortgage or sale of land which lead directly to class discontent, and occasions will arise when the intervention of Government is necessary to prevent the growth of a large body of discontented agriculturists who have lost possession of their ancestral properties."

He proceeds to illustrate these dangers thus:

"The Sonthal rebellion of 1855 was due to an outburst of the peasant debtors against their creditors and there was a good deal of the same sort of thing in the United Provinces during the course of the Mutiny in 1857. The same cause was the origin of the Deccan riots of 1875 and of the riots at Ajmere in 1891. It was therefore held by many competent authorities that the constant transfer of lands from the peasants to the creditor-class entailed a political danger and that the Government could not afford to wait till the danger came to a crisis." Apart from these risks, I hope that the Government will realise the great benefits that will accrue from the early establishment of Land Mortgage Banks to the Indian peasant. Mr. Herrick thus summarises these benefits. "The chief if not the only lesson to be learnt by the study of European Land Credit systems are the wonderful benefits to the farmers, of unrecallable long term reducible loans, and the ease and abundance in which money may be obtained for them by the issue of debentures or mortgage bonds, secured either by the solidarity of the group of landowners or by the assets of a company officially supervised and properly managed." To finance the farmer adequately and satisfactorily is to usher in an era of prosperous rural life and to lay the foundation of economic Swaraj. It is the right way to set about in reconstructing New India.

¹ I quoted some telling figures comparing the production of staple and commercial crops in India with that in other countries in .my article on Rural Reconstruction at page I00 of Triveni. The figures were taken from the International Year Book of Agricultural Statistics for 1909 to 1921 which may be usefully consulted in this connection.

² The reasons for it are summarised thus by the Baroda Committee (I) The overshadowing of personal credit by mortgage may entail a neglect of co-operative principles. (2) The combination of short term business financed out of deposits of short dated credits with long term loans financed out of funds raised on specific security is unsound and risky. (3) The inquiry and valuation preliminary to grant of loans have to be entrusted to a trained agency controlled by and responsible to some central organisation. (4) The maintenance of valuable documents, title deeds, etc., cannot be entrusted to ordinary village societies.

³ J. R. Cahill's report to the Board of Agriculture and Fisheries in England as a result of his inquiry into Agricultural Credit and Agricultural Co-operation in Germany; the report of the American Commission appointed to investigate the Co-operative agricultural finances1, production and rural life; and the report of the National Monetary Commission may be profitably consulted. The report of the Baroda Land Mortgage .Committee 1924-25 also contains an account of Land Mortgage Banks in Germany, Hungary, Austria, Russia, Italy, France, United States and Egypt. Mr. Strickland's Studies in European Co-operation, Vol. II also contains a brief but a clear description of Land Mortgage Banks in various countries.

⁴ For a description of the features of typical co-operative Farm Mortgage Mutual Associations, see pages 76 to 96 of Morman's excellent book on Rural Credits.

⁵ The Federal Farm Loan Act of 1916 is intended to strengthen Farmers' Associations with State help. At the top is the Federal Loan Board. There are 12 Land Banks operating under the management of Directors appointed by the Loan Board. The Secretary or Treasurer is authorised to make deposits in these banks till they themselves own 50 million dollars. The Farmers' Loan Associations subscribe to the share capital in the Federal Banks. The Farmers' Associations consist of 10 or more farmers and each association is empowered to send a loan application for an amount of not less than 20,000 dollars. The association is the co-operative agency through which loans are initiated, the application of their proceeds is supervised, collections are made and local interests of borrowers are reserved. Each member should subscribe 5% of his loan as share capital. The value of a single share is 5 dollars. The Federal Banks issue loans equal to the value of the mortgages held, on the approval of the Federal Farm Loan Board.

⁶ The first Land mortgage Bank for financing agriculture in India was registered in London in 1863 with Mr. Samuel Laing, Finance Member of the India Government from 1860-62, as its first Chairman. It had agencies in the cities of Calcutta, Bombay and Madras and sub-agents in all principal towns and districts in Bengal, Madras, Bombay, Sindh, 4 United provinces and Oudh. It financed the larger landlords. It was wound up in 1885. If commercial Land Mortgage Banks are to be revived, they will be useful to finance bigger landlords and zamindars.

⁷ Punjab. The Jhang Co-operative Mortgage Bank in the Punjab was started In 1920. The working capital of the Bank is obtained by the Issue of shares, debentures and deposits from members and non-members. Members who borrow from the bank must hold one share of Rs 10 for every Rs. 500 borrowed. The Bank is on an unlimited liability basis. The maximum limit of the loan is 15 times the estimated annual net income of the land mortgaged minus the land revenue thereon. The rate of interest on loans is 8% and their maximum is 20 years. The profits of the bank are indivisible and are credited to the reserve fund which is invested outside the bank and maintained as security for the debenture holders. But there are various conditions attached to the loan which are harsh and do not conduce to the popularity of the scheme.

Madras. In 1924-25, a scheme for special Land Mortgage Banks was sanctioned and two were registered in that year. Ten such banks were constituted by the end of June 1927, operating over very restricted areas of compact groups of villages. These are formed on a limited liability basis with share capital, the borrowing power being limited to a multiple of the paid up capital (ordinarily 8 times). The banks raise credit by issuing debentures on the strength of the agricultural lands which the borrowing members hypothecate to it; debentures carry interest at 7 % when sold to the public. The Government have agreed to purchase at 6½ % debentures equal in value to those which the Banks are able to sell in the market, subject to a limit of Rs. 50,000 to anyone bank and Rs. 2½ lakhs for the whole Presidency. The banks lend at 9 % and the maximum amount of the loan does not exceed Rs.2,000. The scheme is not popular and little progress is recorded. Apart from the high proportion of share capital, low maximum individual borrowing power, limited area of operations, and the high rate of 9% interest on loans, the circumstance that these small banks are unable to command sufficient confidence to sell debentures, stands in the way of the further progress of the working of these banks. Only two of these banks, the one at Gudalavalleru near Masulipatnam and the one at Conjeevaram are doing any business worth the name. Recently the Madras Central Urban Bank floated uncovered debentures of 20 years' period at 5% to raise long term money to buy the debentures of some of these banks and give a lifting hand to those which are able to enlist a certain amount of local support. One bank was already helped in this manner and the others will be, if necessary.

The XV Madras Provincial Co-operative Conference approved the establishment of a Central Land Mortgage Bank to float debentures and to finance these primary Land Mortgage Banks and appointed a Committee to prepare a scheme for the purpose. The Committee has just reported suggesting a Central Land Mortgage Bank with a share capital of 10 lakhs and a borrowing power of 25 times the paid-up share capital and reserve fund. The Bank may admit non-mortgage credit societies and individuals also as members, but shall lend only to primary Land Mortgage Banks holding shares. The debentures shall not carry interest exceeding 6%, the loans to primary Land Mortgage Banks not more than 7%, and the loans to members of the primary banks not more than 8%. The scheme is a far-reaching one and if given effect to, will herald a new era in Co-operative land mortgage credit in Madras.

Bombay. A committee known as the Guzarat Committee-so called be cause it was appointed by the Guzarat Divisional Co-operative Conference-recommended a scheme for adoption in Bombay. It contemplated a Mortgage Bank for a 'district' which signified not a revenue division known as a district, but a tract with more or less similar agricultural and economic conditions. Borrowers should be members and should contribute share capital up to one-twentieth of their borrowings. Dividends on shares are restricted to the rate of interest payable on the mortgage bonds to be issued by the Bank. These bonds may be issued periodically up to the limit of the loans outstanding in societies for ten to fifty years at 5%. Loan should not exceed 33⅓ % of the value of the mortgaged land and the rate of interest on it should not exceed 6 to 7 %. The recovery of the loans is to be facilitated by power of foreclosure by speedy procedure being given to the Bank. It is understood that the Bombay Provincial Co-operative Bank will finance these banks and that Government agreed to buy debentures to the value of 5 lakhs from the Provincial Bank.

Baroda. The Baroda scheme is an interesting one. The Bank's constitution provided for the supply of initial capital and working expenses by the Government for a temporary period and for the ultimate devolution of control, management and ownership from the Government to the members of the institution. The borrowers should become members of the bank, taking shares of the face value of 10% of their borrowings. The bulk of the working capital of the bank is to be raised by issuing bonds. These are exempted from income-tax and stamp duty. The Baroda Government is to underwrite the issue of the bank's bonds up to ten lakhs of rupees. The loans will be up to 50% of the value of the property offered as mortgage and the rate of interest is not to exceed the rate charged on the bonds by more than 1%. As links between the bank and the borrowers, Taluka Land Mortgage Associations should be started. They will be advisory bodies to begin with and will eventually develop into branch associations of the bank for transacting its business partially.

Mysore. The Co-operative Committee appointed by the Mysore Government under the presidency of Mr (Now Sir) Lallubhai Samaldas, recommended the establishment of a Land Mortgage Bank with a share capital of 10 lakhs and with authority to issue debentures of not more than 50 laks of rupees, payable at the end of 25 years, but redeemable by the bank after the lapse of ten years on 6 months' previous notice and carrying interest at 6½ %, payment of which should be guaranteed by the Mysore Government. The loans to borrowers should bear interest not exceeding 8% and the period is not to exceed 25 years. The maximum of the loan amount should be Rs. 5,000, but may be raised to Rs. 10,000 in exceptional cases. The bank is to be invested with powers to recall the loan not used for the purpose specified in the application and also to foreclose the mortgage on default by the borrower. No action was taken by the Mysore Government for a long time and it appears that very recently some cautious legislation was passed to install a Land Mortgage Bank with State aid in one district, where conditions are supposed to be favourable for the experiment.

United Provinces. In his evidence before the Agricultural Commission, Mr. Oakland, the Chairman of the U.P. Co-operative Committee, adhered to the view that there was no need for Land Mortgage Banks and it is no wonder that there is no move in the matter in that province.

Bengal. So far as my information goes, the Naogoar Ganja Mahal Co-operative Bank is the only co-operative organisation in Bengal providing land mortgage credit. It also grants cash credit advances to its members. For over half a century, however, loans on land mortgages have been dispensed by what are called Loan Offices operating in several districts. These offices finance mainly landlords on the security of their landed estates. (Patni and Zamindary.) One of the earliest of such offices was the Faridpur Loan Office, Ltd. founded in 1865. There followed in the next decade, the Mymensingh, Barisal, and Jessore Loan Offices. Some of them advance money also on houses, jewellery and gold. But they do not lend to either the agriculturist or for land improvement. So they do not serve the purpose of affording long term accommodation to ryots.

Burma. In Burma there was much activity and a Bill providing for a Land Mortgage Bank practically owned and managed by the Government was introduced, but the scheme did not ultimately materialise.

⁸ I fail to see why Mr. Wolff tries to absolve the Government of India altogether from the responsibility of placing the Land Mortgage Bank's debentures on a methodical and marketable basis. He is not unaware that the State shoulders the responsibility in almost all the western countries. What is not only possible but successful in other countries-co-operative mortgage credit-becomes in India a scheme "to square the circle". Why? Because the State is content to look on.

⁹ The reasons for insisting on share capital are thus summarised by the Baroda Committee. The first and the most important consideration is that the small share capital amounting to 5 % of the loan held in cash and 5% as a reserve liability of the shareholders form a very good guarantee for the bonds issued by the Bank. It is an additional attraction for the bond-holder. The second reason why we recommend this feature is that it enables the Bank first to give loans up to the amount of its share capital and thus makes for economy. In the absence of such funds in the hands of the bank, it would have either to issue bonds every time a loan is required, or to issue bonds for a good round sum and hold the proceeds in its hands till the loans are made. The third reason why we have recommended the capital feature is that the share-holder has a sort of tangible interest in the Bank.

¹⁰ It is true that the loan advanced usually bears a definite ratio to the market value of the security, one-third, half, or two-thirds. But this circumstance has no bearing on the -arrangement for admitting the mortgage. The market value is sometimes determined by peculiar standards. Speculations, competitions, fancy and even sentiment may account for abnormal values. The true standpoint therefore from which the maximum of the loan should in practice be fixed, should be with reference to the net returns from the land which remain after deducting cultivation expenses, value of necessary repairs, taxes and the farmers' subsistence. If a further allowance is made to compensate the ryot for his personal labour which he renders free, than the returns are still further reduced and approximately corrrespond to fair rent on the land. It will be impossible to effectively improve the economic condition of the indebted ryot if he is permitted to oblige himself to pay a larger annuity than the revenue of the mortgaged properties. It is on these lines that in France and in certain other countries, limitations are imposed on the licensed land credit companies regarding maximum instalments demandable by them.

¹¹ Various modes of repayment of the loan are in use in different localities. The two most commonly adopted are these :-(1) By equal instalments of a specified portion of the principal, with interest annually or semi- annually. For example, if a sum of Rs. 1,000 is borrowed repayable in 25 years, the borrower makes 25 annual payments of Rs. 40 each, together with interest on the balance of the principal remaining unpaid in each year. This is the most common method. (2) By amortization proper, that is, by paying off a debt by regular instalments within a time fixed in advance. The annuity to be paid to amortize the debt is determined by the length of the credit and the agreed rate of interest and remaining level during the entire period. Suppose a borrower gives, a mortgage for Rs. 1,000 with 5% interest. In addition to interest he agrees to pay 2% per year of the principal. This makes a total of 7 % a year, in other words, the annual payment will be Rs. 70. It remains the same throughout, while the annual payments are the same, the amount of payment towards principal steadily increases. This is the model adopted by the French Land Mortgage Banks and has many advantages. Amortization tables for various rates and periods are hung up for borrowers' information on the Banks' walls, so that the borrower may determine his own rate of interest and period of repayment, as they suit him best. This method is sometimes called the system of equated payments.