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Saturday, Jul 03, 2004

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Plugging the gap in institutionalised rural credit

V. Jagan Mohan

IT IS heartening that the UPA Government is planning certain concrete steps with regard to rural/agricultural credit, especially in the face of the crisis in the farm sector and suicides by farmers in many States.

The Common Minimum Programme (CMP) talks of doubling rural credit in the next three years at cheaper/affordable rates. Accordingly, the Finance Minister, Mr P. Chidambaram, announced a relief package, rescheduling crop loans to the farming community in affected districts. The Andhra Pradesh Government, too, passed a similar legislation, enforcing a six-month moratorium on non-institutional debt to farmers.

These are claimed as first aid to the farming sector with promise of more concrete measures in the Union Budget.

Status of rural credit

  • The current banking profile (as on December 31, 2003) reflects a low credit-deposit (CD) ratio of 43 per cent and 36 per cent, respectively, at rural and semi-urban centres compared with 66.5 per cent and 57.9 per cent, respectively at urban (inclusive of metro centres) and national levels.

    As at end-June 1969 (the time of nationalisation), the exclusive CD ratio of rural and semi-urban branches of banks were 37.2 per cent and 39.7 per cent respectively, and, as on end-June 1981, this ratio peaked to 57.7 per cent and 49.1 per cent.

    Post-reforms, the ratio almost plummeted to levels that existed at the time of nationalisation. These trends, despite the widespread growth of the banking network, indicate the continued migration of rural/semi-urban savings (estimated at a maximum of Rs 1,30,000 crore) to urban/metro centres, thereby causing a rural-urban banking divide; akin, for instance, to the digital divide. Table 1 presents a reality-check of this divide.

  • Post-reforms, the deposits mobilised by the banking system from farmers (Rs 1,08,233 crore) was way above the credit extended to them (Rs 47,430 crore). Also, the number of farmers assisted declined from 273 lakh in 1992 to 197 lakh in 2002.

  • Only five of 27 public sector banks (PSBs) and two of the 27 private sector banks are meeting the stipulated 18 per cent agricultural credit target.

  • Apart from not meeting the stipulated 18 per cent target, many scheduled commercial banks are shying away from agricultural and priority sector lending by resorting to the soft window option of investing in the RIDF (Rural Infrastructure Development Fund) window of Nabard. During 1995-2003, RIDF contribution by commercial banks was Rs 16,145.37 crore.

    And as on October 3, 2003, scheduled banks had an excess investment portfolio of Rs 2,37,816 crore (40.48 per cent), well beyond the required 25 per cent limit.

  • Similarly, the distribution of the CD ratio in rural/semi-urban/urban areas indicates that 435 of the 589 districts have a ratio of less than 50 per cent.

  • The co-operative credit system, both in the short-term and long-term structures, has come under increasing pressure from the emerging and competitive low interest rate regime. As at end-March 2003, the deposits of 30 State co-operative banks (SCBs) and 366 district central co-operative banks (DCCBs) were Rs 39,000 crore and Rs 73,000 crore respectively.

    It may be noted that the elected boards of 478 of the 1,186 co-operative banks were superseded for a variety of reasons, including political interference.

  • Similarly, regional rural banks (RRBs) — another rural credit infrastructure — are not financially strong because of the crisis in the agricultural and rural sectors.

    As at end-March 2003, there were 196 RRBs with over 14,000 branches covering 516 districts, with deposits of about Rs 48,900 crore, advances of Rs 20,700 crore and investments of Rs 28,400 crore. The gross NPAs of the RRBs stood at Rs 3,200 crore.

    Roadmap for better rural credit flow

    Agriculture, to a large extent, was excluded from the economic reforms initiated in 1991. However, the reforms introduced in industry, finance, banking and other sectors over the last decade have had a big impact on the agricultural sector.

    While financial sector reforms created a level-playing field between rural financial infrastructure and the urban-based commercial banks in treatment and compliance of regulatory/prudential norms, farm sector reforms did not come by. As a result, the rural credit infrastructure is facing acute viability pressures.

    The regulatory norms of rural banking and the enabling support systems governing institutionalised rural credit need to be adequately revamped.

    The rural financial structure needs special dispensation suited to local potential and challenges and to play a vital role in increasing ground-level agricultural credit flow.

    Despite the wide rural financial network, a critical gap in institutionalised rural credit still exists.

    The following need to be looked into to improve the credit flow.

    Structural issues: While agriculture is a State subject, all the macro-level policies/institutions relating to the farm sector — such as rural credit, procurement and storage of commodities, fixing of market support prices, hedging and mitigation of risks, movement and export of farm output and issues of agricultural trade under the WTO — are under the purview of the Centre.

    The role of State governments is restricted to input management, such as provision of irrigation facilities and seeds and agricultural extension services.

    In times of crisis, such as drought and the recent spate of suicides by farmers, State governments resort to short-term and populist measures.

    There should be clarity and a clear demarcation in the roles of the Central and State governments in tackling crises in the agricultural sector caused by external calamities/exigencies.

    Urgently required is a uniform policy mechanism to address recurring crises in the farming sector and ensuring sustained flow of agricultural credit without impairing the rural financial structure.

  • RRBs and co-operatives need to be strengthened with adequate capital support to enable them have a net capital adequacy ratio (CAR) of 5 per cent. This would give them a fresh lease of life under the growing NPA (non-performing asset) burden.

    To strengthen and augment the capital structure of such rural financial institutions, they may be allowed to issue zero per cent preferential capital to be subscribed by the Central Government and to reinvest the same in government securities.

  • The proposed Rs 15,000-crore fund for co-operatives should be utilised for revitalising/revamping the rural credit structure through the involvement of Nabard. Creation of special business units (SBUs) by merging/amalgamating rural financial infrastructure in similar geographical and socio-economic regions under the overall ownership of Nabard would be an innovative step to ensure better rural credit delivery mechanism by reducing the number of players.

  • Nabard may acquire equity stake from the Central and State Governments in the grassroot level rural financial institutions to play a more direct and proactive role in rural credit. Nabard should thus become an apex development bank in the rural and agricultural sectors with majority equity participation in RRBs, co-operative banks and other institutions.

    Nabard is fully equipped organisationally, financially and domain knowledge-wise to emerge a strong player in the rural credit system. It, therefore, needs to be fully vested with an ownership role and proactive operational responsibility of managing the flow of rural credit, and divested of its reactive supervisory role.

    Regulatory issues: The RBI, during the past two decades, has passed on the mantle of rural planning and credit to Nabard, its own subsidiary. With increasing complexity of macro-economic management, the RBI needs to confine itself to a regulatory role for all financial institutions, including rural financial institutions.

    The supervisory role of rural credit needs to be restored to the RBI from Nabard for effective monitoring and control of the entire financial system.

  • Similarly, reforms in the agrarian sector, which was thus far excluded, can be initiated in a measured way. To begin, the concepts of service area and the current structure of district credit committees/State-level bankers committee need to be revisited for inducing greater flexibility/autonomy for bankers for effective grassroot level credit flow.

    There is a need to deregulate the rural market from the service area approach and encourage greater participation of private banks in rural credit. While the rural borrower has become a prisoner of the rigid service area concept, the urban borrower has unfettered access to the banking network.

    For increased and cheaper flow of rural credit: The minimum stipulated 18 per cent benchmark for lending to the agricultural sector by SCBs needs to be hiked to 25 per cent, commensurate with the contribution of this sector to GDP. Similarly, the minimum benchmark CD ratio of 60 per cent must be insisted upon for each bank/rural financial institution in every rural district.

    Rural banking has emerged as a niche operation, requiring special skill-sets and rural sensitivity. The complexities and demands of rural banking now call for more dynamism and youthful talent.

    To bridge the gap in rural credit and manage the rural credit infrastructure effectively, the country would require a number of rural bankers, who are now in short supply. Technology induction in rural banking would facilitate handling the low-value, high-volume business more cost effectively.

    Prudential banking norms, such as income recognition and asset classification (IRAC) and NPAs, need to be different for lending to the rural sector. As cash flows in the rural sector are dependent on good harvest/monsoon, a minimum of two drought-free harvesting seasons from the due date must be allowed for application of the IRAC norms for all types of loans in the rural sector.

    Similarly, the classification/provisioning norms for NPAs must be different for lending in respect of sub-standard and doubtful assets in the rural sector, as this sector is suffering from frequent demands of moratorium, rescheduling and waivers.

    Also, the Central and State governments need to park their rural developmental funds only with rural financial institutions to ensure cheaper flow of demand deposits. And, the refinance rates charged by Nabard for loans below Rs 50,000 to the rural sector needs to be 200-300 basis points below the Bank Rate. These simple measures without any cross-subsidisation would substantially bring down the cost of credit to the rural/agricultural sector at affordable rates.

    The computerisation of land records at the village level should be expedited to facilitate larger credit flow. The total revamping of the crop insurance scheme to make it more equitable and broad-based also needs to be addressed.

    The provision of agricultural credit through groups/village panchayats on the lines of SHGs can be another innovation. Village panchayats can be made accountable for the flow and repayment of rural credit in the envisaged decentralised power structure under the 73rd and 74th Amendments to Constitution.

    Loans up to Rs 50,000 in rural sector should be totally exempted from stamp duty requirements on related loan documents. The loan arrangements up to Rs 50,000 should be excluded from the purview of the Law of Limitation to avoid the cumbersome procedure of obtaining frequent document revival letters. A simple unstamped document with long legal enforceability will lead to hassle-free rural credit benefiting millions of farmers.

    (The author is chairman, Kakathiya Grameena Bank, Warangal. The views are personal. Feedback may be sent to

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