The Hindu Business Line : World Bank asks India to review rural lending policy

THE World Bank has suggested that the Indian Government could revisit its policy of setting interest rate `caps' on rural lending rates and `floors' on deposit rates, because the high transaction costs and collateral requirements were making banking unattractive for the rural poor.

Similarly, the Government could re-look the priority sector lending, since the prescribed quotas were not being fully observed by the commercial banks and often circumvented through means such as subscription to National Bank for Agriculture and Rural Development (Nabard) and Small Industries Development Board of India (SIDBI) bonds.

In its latest study titled, "Scaling-up access to finance for India's rural poor," presented here on Thursday, the World Bank economists observed that the Government policy on interest rates had the opposite effect of what was intended — poor borrowers were cut off from access and ended up paying higher interest rates to informal lenders.

Addressing a gathering of non-governmental organisations, micro-finance institutions (MFIs), bankers, bureaucrats and newspersons, the World Bank Lead Economist, Ms Priya Basu, said there was scope for more attractive spreads for commercial banks if interest rates were further deregulated.

In this connection, she cited the success stories of Indonesia and the Philippines that have no interest-rate controls, but had succeeded in making deep inroads in rural areas.

The World Bank has also suggested the State Governments to avoid moral suasion on interest rates on farm loans and announcements of interest and principal waivers from time to time. The Governments' announcements on interest-rate ceilings, even if with compensatory subsidies to banks, would disincentivise rural bankers, hamper the credit culture that could otherwise have been established. Further, it would lead to expectations amongst farmers that low interest rates would continue in perpetuity, Ms Basu said.

"The State, thus, harms the financial system rather than perform an enabling role. Similarly, interest waivers announced by Governments create an adverse incentive amongst farmers not to service the debt, riding on the expectation that waivers may eventually be announced," the World Bank report has pointed out.

It asked banks to come out with more flexible products and services through streamlining procedures aimed at reducing the transaction costs. It has also suggested expanding the outreach of micro-finance through self-help group bank linkage and MFIs.

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