The Hindu Business Line : More directions

It is a measure of the lacuna of creative policymaking at the Centre that every time it is faced with an apparently insurmountable problem it should resurrect shop-worn cliches to bail itself out. Confronted by the sorry fact that after four and a half decades of directed banking, the rural sector is still starved of formal credit lines, the Government sings the same weary tune of directed lending turning a blind eye to the ubiquitous presence of the moneylender. Many commissions and inquiries later, all that the policymaker can acknowledge is the widespread indebtedness and the solution they seem to find reflects their incapacity to go beyond that superficial recognition.

The Reserve Bank of India has issued fresh guidelines for directed lending to the priority sector, guidelines that will push banks, including foreign owned ones, into extending an extra Rs 50,000 crore as rural, small industries, micro-credit and housing loans to the low- and middle-income groups. Indian banks will have to set aside 40 per cent of their adjusted bank credit or the credit equivalent of off-balance-sheet exposures for the priority sector; for foreign banks it would be 32 per cent. The two main sectors being targeted are agriculture and small business units. At the basic level, the RBI guidelines are no different from the populist policies of old; for that very reason they are bound to face the same obstacles that made directed lending a patchy success. In the farm sector, for instance, high-risk premiums attached to a very uncertain business cycle will make bank credit unworkable; for that very reason informal credit works so well and farmers find themselves in the clutches of the moneylender. Try as hard the policymaker might, banks can never match the business model of the indigenous lender.

A more practical approach may be to bring the moneylender into the mainstream, as the Prime Minster had suggested some weeks ago. Infusing competition among moneylenders, with banks sponsoring each of them, can bring down the usurious interest rates, but the bottomline is that farming per se must be made less risky, more viable and truly bankable. That can happen only if the frail infrastructure, such as irrigation and transportation systems, is rejuvenated and new technologies introduced. As for the small sector, it is often not the shortage of capital as much as the lack of a conducive environment for commercialisation of new ideas and business models, and the inaccessibility of markets that contribute to failure.

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