The Hindu Business Line : RBI nudges pvt banks to lend to farmers

Bankers are split on whether funds will touch the poorest, but the experiment is worth the effort if the moribund Nabard extends marketing and technical inputs.

IF not in the near future, at least in the far future, bankers offering loans to needy farmers could become as familiar a sight as bullock carts in rural India.

It just could be that new private banks (modelled on foreign banks) may start believing that the farming community can be turned into reasonable business propositions. The long hapless wait of farmers at hostile bank counters could become shorter.

Two RBI decisions in the recent (Oct. 26) Credit Policy will push the banking industry to fill rural spaces.

The RBI has knocked away the restrictions on the Service Area Approach (SAA) which bound forever a few villages to a particular branch.

The monopoly of bank branches has ended though the policy roll-out will take some time with RBI and Nabard in talks.

From now on, any branch of a bank (private or government) can service any village with none claiming proprietary rights.

With the co-operative credit channels and regional rural banks (RRBs) running dry of cash, the current policy response offers options. But Government-sponsored programmes will adhere to rules under SAA.

Private banks in Thane could, for instance, access villages in the tribal district and offer loans linked to their crafts or farms.

Interest rates are not an issue as a villager will surely not object to banks pushing for a stiff 13 per cent (normal practice) when the money-lender charges anything between 24 per cent and 36 per cent per annum.

The RBI has acted promptly on the Vyas report on flow of credit to agriculture.

The SAA came into being in 1989 and the report finds "a mismatch between the credit potential and deployment of credit primarily due to the absence of effective local planning, available infrastructure and forward and backward linkages."

Some of the limitations listed in the report are: a) the borrowers are forced to approach only the service area branch even if they are not satisfied with the quality of service; b) private banks are not in a position to extend finance in rural areas due to SAA restrictions; c) non-SAA branches wait for "no-objection" certificate from the SAA branch much beyond the mandated 15 days delaying fund flows; d) in some States, few branches have been allotted unmanageably large number of villages with the result that the resources of the branches are thinly distributed and the credit needs of certain villages are not adequately served.

Bankers are split on whether funds will touch the poorest but the experiment is worth the effort if the moribund Nabard extends marketing and technical inputs.

After all, the central bank has told banks "to increase their disbursements to small and marginal farmers to 40 per cent of their direct advances under Special Agricultural Credit Plans (SACP) by March 2007."

The RBI could have also scrapped the Lead Bank Approach which has not gone beyond collecting some irrelevant statistics, say a few bankers.

The RBI has tagged the relaxation to extending the concept of Special Agricultural Credit plans to private sector banks.

"All private sector banks will have to formulate special agricultural credit plans for 2005-06, "targeting an annual growth rate of at least 20-25 per cent of credit disbursements to agriculture."

Will the banking industry now respond and not whine over transaction costs?

New branches could add to cost and can be got over if some of the branches of RRBs or even public sector banks are allowed to be sold to private banks.

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