The Hindu Business Line : Can RBI be an effective driver of credit growth?

The Reserve Bank of India has been associated in the public mind with a negative image of an agency that throttles credit. Its monetary policy statements have tended to focus on credit growth as a contributory cause of liquidity, leading to inflation, rather than an outcome of inflation. In fact, as input and output prices increase, the economy needs more credit, rather than less, to move goods and services. But inflation fighters in the RBI try to "de-grow" credit by putting caps on segments they consider inflationary, such as housing, real-estate, credit cards and personal loans.

It is fortunate that, so far, the RBI's icy gaze has not gone in the direction of agriculture. Indeed, in this respect, the directive that the RBI has from its political masters is just the opposite. The Finance Minister had set before the nation an objective of doubling credit for farmers over the past few years.

It is ironical that while the RBI is trying to curtail credit growth in many sectors, the same institution has set itself the desirable objective of growing farm credit.

A difficult trapeze act

We get conflicting signals. The Finance Minister and the Ministry of Finance lecture the RBI to grow credit and keep lending rates for agricultural loans low, even though they realise the policy rates are generally being hiked.

It is perhaps an indication of the complexity of the economic growth process that the RBI has to contend with these divergent indications — the need to "grow" credit, lower interest rates for certain segments and, at the same time, maintain a posture of inflation management by raising rates and decreasing liquidity.

As a result, banks are, so to say, asked to run a hurdle race. Their liquidity is restricted. Their costs of borrowing are kept high while they are asked to lend at lower rates and increase the credit flow. A difficult enough trapeze act, both for the regulator and the regulated!

Kisan Credit Cards

In this complex mix of objectives, the RBI's latest monetary policy strikes out in many new positive directions to attain its goal of higher inclusive credit — credit reaching out to the depressed sections of society in the face of all constraints.

Insofar as credit for agriculture is concerned, the RBI's latest policy mentions the growth in special agricultural credit plans. Further, since the inception of the Kisan Credit Card Schemes in 1998, public sector banks have issued 25.6 million Kisan Credit Cards covering limits aggregating to Rs 88,000 crore roundly. The RBI's cautionary notes against credit to credit-card holders are apparently muted insofar as its own creation — the Kisan Credit Cards — is concerned.

The policy also notes with approbation the steps taken by the Government with regard to strengthening the Rural Infrastructure Development Fund (RIDF). Cumulative sanctions under the RIDF's various tranches up to February 2007 come to Rs 59,000 crore, but the disbursements are a tad lower at Rs 35,121 crore. Sanctions and disbursements have to march in step. That, of course, is the domain of State Governments. It would be useful to have a State-wise review of performance under the well-intentioned and well-designed scheme!

Priority sector guidelines

The latest monetary policy note indicates that guidelines on lending to the priority sector as such have been revised to focus on sectors that impact the weaker segments of society and are employment-oriented. Priority sector, by definition, indicates how the Government and the RBI have applied their collective minds to what would have the biggest impact on the weaker sections and contribute to growth of employment.

Further refinement of these guidelines will mean that the priority sector itself gets more stratified and priority further diluted. This can give rise to unnecessary confusion among lending agencies and cause difficulties for borrowers.

Simplifying agri loans

The latest monetary policy note also deals with the simplification of procedures and processes for obtaining agricultural loans. In particular, it refers to the recommendations of a Task Force set up by the RBI as a result of which, for instance, the requirement of a "no due certificate" for borrowers of small loans below Rs 50,000 for agriculture is dispensed with, for certain categories.

The revised procedure lays down that a self-declaration by the borrower is sufficient. It also indicates that certificates can be provided by panchayat raj institutions regarding the cultivation of crops by landless labourers, share-coppers and oral lessees. This is perhaps almost similar to the sub-prime lending episodes in US housing loans recently.

In my view, lenders cannot escape the painstaking obligation and detailed diligence of directly verifying the claims of borrowers regarding no dues. Further, the proposal to allow panchayat raj officials to give certificates, which would make borrowers eligible for loans, can open the doors wide to another type of scam, considering the factional politics that characterises most of our panchayat raj institutions.

It is with regard to "distressed" farmers that the RBI's latest monetary policy notes indicate lines of new advanced thinking. It refers to the recommendations of a Committee headed by Prof Johl on the introduction of a specific credit guarantee scheme for small farmers. It is proposed by the RBI to introduce such a credit guarantee scheme for distressed farmers. While the details of the guarantee scheme are still awaited, the decision itself is a good augury for farmers in general!

There remains, however, an inherent contradiction between the pro-growth impulses shown by the RBI as exemplified above and its regulatory guidelines, especially the introduction of Basel-II framework.

Perceptive observers of the banking scene recently pointed out that the Basel-II structure prescribes higher capital adequacy requirement for loans that are rated to be more risk-prone by rating agencies — which process is implicit in Basel-II norms. It is quite likely that much of priority lending may be rated under this higher risk weightage. It is obvious that the RBI has to find a solution to the contradiction with a view to allowing banks to live with lower capital adequacy requirement.

There is need to protect banks against providing more capital just because they have strictly followed the RBI's liberalised guidelines.

In this context, the RBI's emphasis on expansion and merger of Regional Rural Banks (RRBs) is of interest. RRBs have been, by and large, powerful instruments for agricultural credit expansion. But they have tended to display a generic tendency to outgrow their original purpose, viz. of lending for agriculture based on locally recruited staff. In effect, RRBs have tended to become just yet another type of rural banks transacting all kinds of business.

Credit Agricole model

Perhaps, it is appropriate at this juncture to study the model of Credit Agricole, developed in France, where a number of local agricultural credit institutions have been amalgamated to become a national level bank with a credible and serviceable track record. Whether our RRBs can expand through mergers and acquisitions to form an Indian Credit Agricole is worth exploring!

By and large, the latest monetary policy note incorporates many initiatives that demonstrate the RBI's intention to nurture growth at the same time as managing inflation. Its attempt to follow the twin objectives is creditable.

Hopefully, the RBI will iron out the conflicts and contradictions that are inherent in the approach. I hope its current policy of consensus-building and transparent decision-making will stand it in good stead in this difficult task.

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