The Hindu Business Line : Caution is the word on 100% FDI in agri banks

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Caution is the word on 100% FDI in agri banks

Restrict them to unbanked areas; beware corporate farming: Experts

The survey suggestions
Allow 100 per cent FDI in greenfield private rural agricultural banks.
Such a bank would be free to set up any number of branches in any rural or semi-rural area and to lend to agriculture and allied sectors, agro-processing and agro-input industries anywhere in the country and to any industry located in non-urban area.
Such a bank can take over other private sector banks and as an incentive, could be allowed expansion into small towns when the general FDI policy on banks will be liberalised.

A.J. Vinayak

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Mangalore, Feb. 28 The policy option put forth to permit 100 per cent FDI in green-field private rural agricultural banks in the Economic Survey 2007-08 has been welcomed with a note of caution by the experts in rural banking and rural development.

Prof N. K. Thingalaya, noted rural banker and former CMD of Syndicate Bank, told Business Line that the proposal is an innovative idea. It would be desirable to ensure that these banks go to the most un-banked districts, especially in the north-east, where the banking penetration is very low.

“Instead of permitting them to open branches anywhere in the country, they may be directed to operate in the 80-odd districts already notified by RBI, as poorly banked and where ‘gramin’ banks are not in operation. It is also necessary to ensure that the ‘gramin’ banks operating in the rural areas are not affected by the new banks,” he said.

Dr L. H. Manjunath, Executive Director of Shree Kshetra Dharmasthala Rural Development Project (SKDRDP) — an NGO involved in rural development activities — said that many financial institutions are serving in certain pockets of rural India, such as southern and western India, Punjab and Haryana. “In such a situation, the Union Finance Ministry should direct the foreign companies to invest in under-served areas, rather than allowing them to compete in the existing markets,” he said.

TAKE OVER

Dr Thingalaya suggested that the Government may examine the feasibility of allowing some of the new banks to take over a couple of loss-making ‘gramin’ banks, which have a rural base already built up. “Instead taking over the old private sector banks, they may as well buy out the selected ‘gramin’ banks in the backward states,” he said.

Dr Manjunath wondered what will be the fate of PACS (primary agriculture cooperative societies) with such a proposal. There have been lakhs of PACS in the country, investing crores of rupees in rural sector. “Will they be wiped out or allowed to compete?,” he asked.

Mr Ananthakrishna, Chairman and Chief Executive Officer of Karnataka Bank Ltd, told Business Line that such a move will be good, if there is a good repayment culture. “Otherwise, it may lead to chaos,” he said.

CORPORATE FARMING

Dr Manjunath feared that the flow of big money into the sector would lead to corporate farming. “If that happens, nearly 50 per cent of farmers, and close to 25 per cent to 30 per cent of lives, will be in jeopardy,” he said.

Touching upon the rate of interest to be charged by such banks, Prof Thingalaya said some microfinance institutions are already exploiting the rural poor as their operations are not regulated by the RBI. This should not happen in the case of the new rural banks, he said.