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P. Devarajan

Over the last two years, the banking system has defaulted on the 18 per cent norm and some bankers quote the Narasimham Committee report pleading for pruning the 40 per cent norm. The argument goes New Delhi and the State governments have to create the conditions to make farming a viable activity with banks acting as facilitators.

IS the Government and the Reserve Bank of India thinking of altering the concept of priority sector lending? The Annual Policy Statement for 2005-06 of Dr Yaga Venugopal Reddy does suggest some changes in the future.

The RBI has spent two paras styled "Priority Sector Lending" and they seem significant. The RBI says: "Prescriptions relating to priority sector lending have been modified from time to time and generally the eligibility criteria have been enlarged to include several new areas. In December 2004, it was decided that only advances will be eligible, thus, beginning a phased withdrawal of eligibility of investments in bonds. There have been suggestions for a further review of the eligibility criteria and other related aspects."

"One view is that lending to any infrastructure project should be made eligible for priority sector lending while making sub-targets fungible within the overall target. There is another view that enlargement of areas has resulted in loss of focus. It is also held that credit growth in housing, venture capital and infrastructure has been strong while it has been sluggish in agriculture and small industries."

"Further, it is argued that only sectors that impact large population, weaker sections and are employment-intensive such as agriculture, tiny and small industry should be eligible for priority sector. Since there are several issues that need to be considered in this regard, it is appropriate that these are debated and examined in depth."

No RBI document could have ended more tepidly. At no point of time has the banking system taken kindly to the 40 per cent priority sector lending norm and surely has been hostile to the 18 per cent advances norm to agriculture.

The RBI has never been enthusiastic over farm lending while Nabard is a lost case. Over the last two years, the banking system has defaulted on the 18 per cent norm and some bankers quote the Narasimham Committee report pleading for pruning the 40 per cent norm. This section believes funds will chase viable farm projects making mandatory lending onerous as banks have to earn profits and are no more charitable trusts. The argument goes New Delhi and the State governments have to create the conditions to make farming a viable activity with banks acting as facilitators.

Is it that simple when poor farmers across the country have to depend on the informal sector for funds at 24-36 per cent per annum? Yet, the same banks have been funding industry, creating billionaires.

The Task Force on Revival of Co-operative Credit Institutions finds the rural co-operative credit delivery system accounting for 34 per cent of credit flow in 2002-03 (62 per cent in 1992-93) while the share of RRBs and banks is put at 9 per cent in 2002-03 (5 per cent in 1992-93) and 57 per cent (33 per cent) respectively.

"Two trends emerge from the overall flow of credit to agriculture from the commercial banking sector. The number of rural branches of commercial banks has gone down marginally as part of the branch rationalisation programme. The second trend is that even though the commercial banks almost meet their targets for lending to the priority sector, they have moved towards larger customers."

"The average size of direct loans to agriculture in the portfolio of the commercial banks was Rs 13,500 in 1997 and is Rs 31,585 now. The average size of loans of the primary agriculture credit societies (PACS), in comparison, is currently only Rs 6,640 per borrower," says the task force. Apparently, the poor farmers are banking with the informal sector, which is unacceptable. Bankers familiar with farm credit contend it is not the price of money but its conditional availability which makes farmers at lower end of the spectrum approach money-lenders. Banks insist on collateral when the poor and landless farmer has nothing but his living breath to pledge.

If the farm sector does not flourish, there is no way industry can expand markets and when that does not happen the GDP will not grow at 7 per cent.

Farming and farmers do not occupy centre space in any bank discussion and that is a hangover from the Second Plan and the Mahalanobis model which effectively reduced agriculture to small print. This is not the time to dilute the concept of priority sector lending.

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