The Hindu Business Line : The lending conundrum

RAJENDRA SINGH RATHORE, an organic farmer of Sailana in Ratlam district of Madhya Pradesh, wonders why a tractor loan from a bank costs 12 per cent and finance for a car around 9 per cent? Micro-Finance Institutions (MFIs) charge an outrageous 24 per cent per annum on loans for the rural poor. Rural credit co-operatives have turned financially tenuous while the share of the Regional Rural Banks (RRBs) in rural credit is a low 9 per cent.

The sole working experiment is the SHG-Banks Linkage programme with the latter offering funds at 8.5 per cent. The number of SHGs credit-linked to banks has shot up from 255 as at end-March 1993 to 16.18 lakh as at end-March 2005 with Nabard picking up a bill of around Rs 8 crore last year to seed the model, mostly in the Deccan plateau, which has a tolerably efficient banking spread. But the SHG model, offering consumption loans, has to be upscaled for production loans to profitably root the rural poor. That is still to happen. Pilot projects have started off under the Joint Liability Group (JLG) experiment where tenant farmers, without collateral, form clusters to access loans from the RRBs. The initial reports are good. The Reserve Bank of India believes ancillary loan models "can supplement rather than be a substitute" for a developed banking structure. That leaves nationalised banks with the job of manning credit channels in some of the poorest States such as Bihar and UP.

ICICI Bank has been trying to strike out by building rural loans, which it bundles for downloading to others in the loan-book market. Government banks still insist on collateral. Nabard, priding itself as the premier agri-bank, has not done enough. At a recent CII conference on rural markets, the RBI Deputy Governor, Dr Rakesh Mohan, routinely exhorted bankers to "be innovative on farm credit." Most, if not all banks, have defaulted on the 18 per cent lending norm for agriculture while a diluted priority sector lending prescription has failed to channel funds to the rural areas. Bankers whine over high transaction costs in servicing a large number of rural accounts even while hooking rural branches to computers. Why should the transaction cost of a tractor loan be higher than a car loan? How many rural branches work flexitime to adjust to the lifestyles of farmers? How many farmers, say in Punjab or Tamil Nadu, benefit from sub-PLR (prime lending rate) lending?

A way to rustle up interest in Rural India is for the government to pay wages to workers participating in its anti-poverty programmes by cheque or electronic means; this will offer banks sizable free floats for recycling to farmers at low cost. The Maharashtra Government has decided to make relief payments to flood-affected farmers by cheque and banks should not now whine over opening new accounts free. Possibly a change will be forced on the banking system as corporates pull away to grow on their earnings rather on bank credit; when contract farming by corporates and commodity exchanges run by traders reach the farm gate, a demand for low-priced loans will follow. Bankers will then have to move to build a fresh asset book by quoting sub-PLR lending rates — a job only a new set of bankers can do.

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