The Hindu Business Line : Bankers not happy over diktat on farm credit

BANKERS are not exactly happy over the Budget diktat to raise the flow of credit to agriculture by 30 per cent in 2005-06 as it comes over a 30 per cent hike order in 2004-05.

On June 18, 2004, the Government got banks to mark up rural credit by 30 per cent in 2004-05 over an estimated credit flow of Rs 80,000 crore in 2003-04.

Going by the Economic Survey, flow of institutional credit (co-op banks, RRBs and commercial banks) to the farm sector stood at Rs 86,981 crore in 2003-04 going up to an estimated Rs 1,08,500 crore in 2004-05. In 2003-04, the banking sector did meet the 40 per cent priority sector norm with that of public sector banks moving up from 42.5 per cent in 2002-03 to 44 per cent of total net bank credit in 2003-04.

Total outstanding advances by foreign banks moved up from 33.9 per cent in 2002-03 to 34.8 per cent against the target of 32 per cent of net bank credit; private sector banks also did well improving from 44.4 per cent in 2002-03 to 47.4 per cent in 2003-04. Scouring for details indicate that the positive trend can be put down to including non-farm sectors in defining priority sector.

Within the overall ceiling of 40 per cent, the sub-targets fixed for agriculture and weaker sectors are 18 per cent and 10 per cent respectively and farm advances by public sector banks in 2003-04 fell short by 2.6 per cent at 15.4 per cent; that for weaker sections dropped short by 2.6 per cent at 7.4 per cent. Lending to agriculture by public sector banks has been stuck in the 15.4-15.7 per cent range of net bank credit between 2000-01 and 2003-04. That by private sector banks to the farm sector and weaker sections came to 15.8 per cent and 1.3 per cent of net bank credit in 2003-04.

It's the same tale for the SSI sector and the Survey admits: "The decline in the share of SSI sector in total net bank credit has been a matter of grave concern."

For public sector banks, the share of SSI advances shows a drop from 14.2 per cent in 2000-01 to 10.4 per cent in 2003-04. For private sector and foreign banks, the corresponding declines have been from 13.8 per cent to 7.1 per cent and from 10.6 per cent to 10.4 per cent respectively.

In sharp contrast, advances by the banking system to "sensitive sectors" like capital market, real estate and commodities came to Rs 27,455 crore as of end-March 2004. Capital markets saw a hefty growth of 34.2 per cent followed by commodities (13.9 per cent) and advances to real estate (13.7 per cent) though the total forms just 3 per cent of aggregate loans and advances.

Factor in the spurt in non-food bank credit and one may put forward the argument that the Indian banking system exists only for the corporate sector.

And the triple-rated corporates have been able to lay their hands on cheap bank credit with others paying a premium. The banking system is out of the ICU with profits up and NPAs down.

Best is to quote the Survey: "Interest spread is an important indicator of efficiency of banking operations. The growth of spread in recent years clearly establishes that banks have not fully passed on the benefit of falling interest rates to their customers. Despite the initiatives taken by the RBI, lending rates of banks have exhibited considerable downward rigidity.

Net interest income (annualised) of scheduled commercial banks as a proportion of total assets improved to 3.1 per cent in the second quarter of 2004-05 compared with 2.9 per cent in the corresponding quarter of last year."

The adoption of the 90-day delinquency norm has not pushed up NPAs. The gross NPAs have fallen from 4 per cent of total assets in 2002-03 to 3.3 per cent in 2003-04 with net NPAs going down from 1.9 per cent to 1.2 per cent.

In numbers, gross NPAs have come down from Rs 68,717 crore in 2002-03 to Rs 64,787 crore in 2003-04 while net NPAs have declined from Rs 32,670 crore to Rs 24,617 crore in the same period.

Advances to non-priority sectors formed for the bulk of the outstanding NPAs for public sector banks (51.24 per cent of total) and private sector banks (75.30 per cent) while that for agriculture and SSIs have come down.

Can a stronger case for rural credit at 8.50 per cent to 9 per cent be made?

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