The Hindu Business Line : Time to compress rural credit delivery system

THE Parliamentary Consultative Committee attached to the Finance Ministry has endorsed the Vaidyanathan Committee report (Task Force) on revamping the rural co-operative credit system and the Union Finance Minister, Mr P. Chidambaram, plans to call a meeting of the Chief Ministers in May to discuss the report.

Financial aid to the sick rural co-operative credit system is going to be conditional, a point made by the Committee. "If the States are ready to accept the conditionalities for bringing about the legal, administrative and structural changes and to participate in the scheme and share its financial liabilities, financial assistance would be released linked to the conditionalities attached to it," says an official press note.

It is hard to see State Governments being prudent even as the Finance Minister has said that "as part of the financial restructuring, assistance would be available for wiping out accumulated losses, covering invoked but unpaid guarantees given by the Sate Governments, increasing the share capital to a specified minimum level, retiring Government share capital and technical assistance."

The Task Force estimates the fund support for the three-tiered rural co-operative credit structure at Rs 10,839 crore based on balance sheets as of March 31, 2004 and it could go up if the closing date is taken as March 31, 2005. Bringing in Rs 4,000 crore for contingencies, the relief package could cost Rs 14,939 crore.

Importantly, the Task Force has linked help "to a rigorous classification of the co-operative credit structure into institutions which deserve capital support and those that do not''.

To expect State Governments to stick to tough norms is being wildly optimistic.

At the meeting of the Parliamentary Consultative Committee some members suggested that a) RBI should not be the supervising/inspecting authority to monitor the implementation. It should only lay down prudential norms and b) there should be another body at the State level to handle this work.

Perhaps the members of the Task Force were aware of the political pressures when they made it amply clear that RBI should be the lone regulatory authority. While suggesting a Model Law for the sector the Task Force says: "It should explicitly recognise RBI as the sole authority to use its powers under the Banking Regulations Act to ensure observance of prudential norms by co-operative credit societies that accept public (non-member) deposits."

Currently, RBI sets the rules and Nabard supervises which does not seem fair as Nabard also doubles as a refinance agency. State-level bodies, if set up, will not be able to fob off local political pressures.

A third point made by the MPs is that "the co-operative societies should get loans directly from Nabard/public sector banks/state banks and not through district level banks."

Nabard, being a refinance agency, cannot lend directly while Government banks will be violating every prudential norm by giving loans to a sick financial sector; it may be better for them to offer loans to farmers directly.

Perhaps, the most interesting demand is for another task force to "go into much needed structural reforms" and that the "reform experiment should be done on select co-operatives as models first and then extrapolated to other banks."

There exist today as many reports as there are co-operative credit societies and apparently the country's legislators are not keen on any conditional reworking of the system.

May be there exists a veiled demand for free Central credit for the co-ops to wipe off their losses without any surety that the clean-up will be the last.

One wonders whether the political system is keen on the job when New Delhi has stipulated doubling the flow of farm credit in three years.

How can a defunct rural credit delivery system purvey credit to farmers?

It is time to compress the rural credit delivery channels including the Regional Rural Banks and link them with Nabard which should be turned into a retail bank accepting public deposits.

Development financial institutions without access to cheap public deposits have no role to play and that applies to Nabard and IDFC.

Nabard does not want change, explaining the reluctance of its board to push the idea in New Delhi.

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