The Hindu Business Line : Revitalise rural credit thru Nabard

The huge gap in rural credit still exists in spite of a wide rural credit structure. Therefore, the time has come to leverage Nabard's formidable financial strength to revitalise the rural credit structure.

THE National Bank for Agricultural and Rural Development (Nabard) was set up on July 12, 1982, as a development bank under an Act of Parliament. The bank began its journey by taking over the agriculture credit functions of the Reserve Bank of India and the refinance functions of the then Agricultural Refinance and Development Corporation (ARDC).

Nabard's mission is to "promote sustainable and equitable prosperity in rural India through effective credit support, related services, institution development and other innovative initiatives." Its prime function continues to be that of refinancing, supplementing the resources of co-operative banks, regional rural banks (RRBs) and commercial banks against the amounts lent at the grassroots level for agriculture and rural development.

Apart from its developmental role, Nabard has also been entrusted with certain supervisory functions in respect of co-operative banks and RRBs under the Banking Regulation Act, 1949. It may be noted that co-operative banks and RRBs have been in existence much before Nabard.

In the 1990s, gross capital formation (GCF) in agriculture witnessed a declining trend. This apart, commercial banks, which were assigned the task of channelling at least 18 per cent of their total lending to agriculture, were not able to fulfil their commitment.

It was, therefore, considered desirable to create the Rural Infrastructure Development Fund (RIDF) out of the shortfall in commercial banks' lending to agriculture, to be managed and operated by Nabard.

The fund was set up in 1995-96 with an initial corpus of Rs 2,000 crore for providing loans to State governments and state-owned corporations for projects relating to minor and medium irrigation, soil conservation, watershed management and rural infrastructure (such as roads, bridges and market yards).

Investment projects under social infrastructure, such as construction of primary health centres/schools, providing drinking water, and so on, were also supported under the RIDF.

Financial scorecard

Through its main refinance portfolio to rural financial institutions (RFIs) and mobilisation and disbursements under the RIDF, Nabard has over the past two decades built up a strong financial base. Its working capital and income showed marked improvement after the management of the RIDF was taken over in 1995-96.

Rural financial institutions

Grassroots level RFIs comprise cooperative banks and RRBs.

Co-operative credit structure: Co-operative credit institutions, in existence since Independence, continue to play a crucial role in dispensation of credit for agriculture and rural development.

They are run by the respective State governments, and the short-term credit structure is managed by State co-operative banks (SCBs) and district central co-operative banks (DCCBs). Primary agricultural credit societies (PACSs) are short-term co-operative credit institutions dealing directly with individual borrowers.

The long-term co-operative credit structure is managed by State co-operative and agriculture rural development banks (SCARDBs) and primary co-operative agriculture and rural development banks (PCARDBs).

RRBs: These were set up in 1975 under an Act of Parliament to exclusively cater to the credit needs of the rural population, especially small and marginal farmers. The ownership structure of RRBs is, the Central Government (50 per cent), the State government concerned (15 per cent) and the sponsor commercial bank (35 per cent). The sponsor bank manages the RRB concerned. There are 196 RRBs spread over 516 districts with a branch network of 14,433. At the grassroots level, RFIs are under financial stress because of the prevailing agrarian crisis coupled with frequent droughts in the hinterland.

As on March 31, 2003, 43,511 of the 98,247 PACSs incurred losses. Under the co-operative credit structure, 527 of the 1,185 elected bank boards have been superseded by Nabard owing to weak financials. And the RBI has classified 97 of the 196 RRBs as weak.

Nabard, on the other hand, has built an enviable balance-sheet vis-à-vis other developmental banks on crucial indicators. As on March 31, 2004, Nabard's net worth (capital plus reserves) was Rs 7,291 crore and the capital-to-risk-weighted assets ratio (CRAR), 39.41 per cent. The NPAs were 0.0035 per cent and standard assets, 99.996 per cent.

There are 11.55 crore farmer households in the country, of which, 9.27 crore belong to small and marginal farmers. Institutional rural credit is accessible to only around 50 per cent of these farmers.

At the same time, as on March 31, 2003, 42 per cent (Rs 29,706 crore) of aggregate institutional credit flow to agriculture and allied activities (Rs 69,560 crore) was contributed by RFIs alone.

Only five of the 27 public sector banks (PSBs) and two among the 27 private sector banks are meeting the target of 18 per cent under agricultural credit.

Recommendation

Over the past two decades, Nabard has evolved into a strong and rural-sensitive apex developmental institution with a complete grassroots level understanding of the complexities of the agricultural and rural sectors.

Nabard is now a major shareholder in the Agricultural Insurance Corporation of India. It also has equity stake in NCDX (National Commodity and Derivatives Exchange) in association with other national-level institutions such as ICICI Bank, the LIC and the NSE (National Stock Exchange).

Nabard needs to acquire from the Central and State governments, equity stake in grassroots RFIs to play a more direct and proactive role in rural credit.

The bank is fully equipped organisationally, financially and domain knowledge-wise to emerge as a strong player in the rural credit system. Promoting self-help groups reflects Nabard's capabilities in capacity-building and nurturing the rural credit delivery system.

Thus, Nabard needs to be fully vested with ownership role and proactive operational responsibility of administering and managing the rural credit structure and divested of its supervisory role in favour of the RBI.

Only such a bold and innovative measure would pave the way for doubling of rural credit in the next three years in a sustainable manner.

(The author is Chairman, Kakathiya Grameena Bank, Warangal. The views are personal.)

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