Rural Indebtedness (to 1947) as a problem was in existence throughout Bengal history, though in the early part of the twentieth century, particularly from the 1930s, it assumed alarming proportion. Rural credit is common to all agricultural economy based on uncertain natural irrigation. Because of its absolute dependence on monsoon rains Bengal agriculture had always been uncertain and depended on credit from formal or informal sources. There are records that ancient rulers had come forward with aids and subsidies when the peasantry was affected by crop failure and consequent scarcity or famine. Taqavy or agricultural loan from the government was very general during Mughal times. Besides government support to peasantry, informal credit was also made available in all phases of Bengal history. mahajans (moneylenders) and bania are ancient credit institutions. Kautilya's Arthasastra is an elaborate treatise on the system of money lending and rate of interest. Indebtedness was thus normal and the agricultural debtors always took it as a passing phenomenon. Rural deficits were normally repaired by loans advanced by mahajans, neighbours and relations.

But indebtedness as a chronic problem began to develop from the closing years of the 19th century. By the third decade of the 20th century it posed as a real threat to the rural economy. The unstable jute market during the first two decades of the twentieth century and depression of 1930s had shattered the rural economy of Bengal. Markets of jute and paddy, the two lifelines of peasant economy, collapsed completely. Prices of these commodities fell far below their production cost. Conversely, the prices of essential non-farm products did not fall proportionately. As a result, the peasants had lost purchasing power. As the depression resulted in the contraction of credit, the mortgages were quickly replaced by direct sales of lands. The rich peasants and mahajans availed of the opportunity of the declining prices of agricultural commodities. Every indebted peasant was trying to survive by transferring lands.

Under the circumstances of rising indebtedness and deteriorating relations between debtors and creditors the government had to enact necessary laws to cope with the situation. Series of laws were thus enacted. While these enactments could solve some problems, but at the same time created some new. To overcome the depression effects the government enacted Bengal Agricultural Debtors Act of 1935 (BADA). This Act embodied the recommendations of the Board of Economic Enquiry, which was previously set up to investigate into the economic ailments and make remedial recommendations. The Board suggested the policy of scaling down of debts reached amicably between the creditors and debtors, and the local Debt Settlement Board (DSB) was to arbitrate a settlement. The authority took the amicable settlement of debt as the only way out to solve the problem of rising indebtedness.

The authority expected that the operation of the BADA would improve the agrarian relations as well as restore the shattered economy to its health. But the new policy had signally failed to produce the desired results. The DSB could settle only a small fraction of the total volume of rural debts. It seems from the statistical data of the operation of the DSB that hardly 23% of the debts claimed was settled under the provisions laid down by the BADA. At the beginning of the operation of the BADA the total agricultural debt was estimated at around Rs 100 crores, and at the close of the operation in 1945 the total rural debt was estimated to be around Rs. 150 crores. It means, rural indebtedness continued to haunt the rural economy in spite of the operation of the BADA.

The problem of rural indebtedness was not equally acute in all districts. The highest incidence of indebtedness was located mostly in the jute growing districts of eastern Bengal. Due to cash nexus of jute cultivation the depression had affected the jute growers most. In the absence or scarcity of cash the paddy growers could somehow manage their subsistence, but the jute growers, whose economy was almost entirely market oriented, had to borrow or sell their lands and agricultural stocks to procure subsistence. It is true that the jute growers suffered most, but the financiers of jute cultivation also suffered. Jute did not fetch enough cash for subsistence even, not to speak of clearing off the jute credit. District-wise distribution of applications filed before the DSB indicates that more than two-thirds of applications for debt relief were received from the jute growing districts like Mymensingh, Tippera, Dhaka, Pabna, Bogra and Rangpur. [Ratan Lal Chakraborty]