The Hindu Business Line : Banks fail to meet farm credit target

Loans to farmers are considered a priority sector item. Banks are expected to extend 18 per cent of their loans to agriculture sector. Eighteen of the 27 banks have fallen short, according to statistics provided by the RBI Report on Trends and Progress of Banking in India.

There is no penalty for the not meeting the target. All that the bank has to do is to invest the shortfall in the Rural Infrastructure Development Fund floated by the National Bank for Agriculture and Rural Development.

These investments carry a relatively lower rate of interest - (they get paid between 6.5 per cent and 9 per cent) but banks don't mind. The money is safe.

About the only negative effect is that the RBI will make an adverse comment in its annual financial inspection report of the bank.

What is the problem in meeting the target? There are a couple of practical issues.

Mr V. Leeladhar, Deputy Governor, RBI, and former Chairman and Managing Director of Union Bank of India, explained this in an interview to Business Line, a few months ago, "If we were to finance a Rs 100 crore loan, it becomes virtually impossible to scout around immediately for Rs 18 crore for agriculture.

"Especially, if such disbursals happen in the last quarter, as they usually do. So reaching a target of 18 per cent, based on a level that I am not sure at the beginning of the year, becomes difficult."

The private sector banks are in much worse position as far as agri-lending is concerned. Of the 30 banks, most don't make the grade.

Quite a few don't have the rural network required for increasing their agri-portfolio.

But that may not be a constraint any longer. ICICI Bank for instance achieved its target although it has only about hundred branches in rural areas.

ICICI Bank's Chairman, Mr N. Vaghul, remarked earlier this year in an interview to Business Line, "Earlier, a branch and staff were required to handle rural credit. Now, new private banks have come with a new business model and physical presence is not necessary. You can operate from a remote location. This is the impact of technology and communication. Rural credit would never have been profitable at rates less than 24 per cent, given the cost of operations there. That high level of interest was justified, considering the alternatives that were available. But, today, I think agricultural loans can be provided today at 6-9 per cent using technology. Rural credit will become attractive - on its own merit as a good business proposition."

With the Government pushing banks to lend more to farmers, asking them to double agricultural credit within 3 years, bankers say, the problem of shortfall may not happen this year.

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