The Hindu Business Line : Who's to blame for high NPAs in priority sector?

For that matter do the Government and the Reserve Bank of India care any more for the idea? Has priority sector lending improved the life of the farmers? Has any impact study of directed lending over 36 years been made?

"Even after 36 years of priority sector lending prescriptions, it is observed that certain important sectors in the economy continue to suffer from inadequate credit flow," confesses a Draft Technical Paper by the Internal Working Group on Priority Sector Lending set up by the RBI.

Funds to the priority sector by the commercial banks show an average annual growth rate of 18.4 per cent between 1995 and 2004, marginally higher than the average annual growth of 18 per cent in aggregate bank credit.

"However, the share of priority sector advances as a percentage of net bank credit (NBC) had shown undulating trends during the period," admits the Draft Paper.

In 1995-96, it fell from 33.7 per cent to 32.8 per cent and held steady at around 35 per cent between 1997 and 2000.

It then dipped sharply to 31 per cent in 2001, recovered in 2002 and moved up to 35.1 per cent in 2003 and 36.8 per cent in 2004 - still short of the 40 per cent norm. The number of accounts covered under agriculture (18 per cent norm) has dropped from 2.03 crore in 1995 to 1.99 crore in 2004 and the Draft Paper does not provide any insight.

Neglible rise

Outstanding advances to agriculture as a percentage of NBC have shown a negligible rise from 11.4 per cent at the end of 1995 to 11.5 per cent in 2004.

During 2001-04, the total outstanding credit to the agriculture sector extended by public sector banks stood at 15-16 per cent of NBC while for private sector banks, it moved up from 7.1 per cent to 11.8 per cent.

The average annual growth of direct finance to the farm sector was lower at 13.9 per cent in 1995-2004 with the share of direct finance to agriculture in total agricultural credit dropping from 88.2 per cent to 71.3 per cent. However, the share of indirect credit in total farm credit went up from 11.8 per cent in March 1995 to 28.7 per cent in March 2004, "despite indirect farm advances reckoned only at 4.5 per cent while measuring the performance of banks in achieving the target of 18 per cent of NBC in agriculture."

Credit to SSI sector as a percentage of NBC slipped from 13.8 per cent to 8.2 per cent in 1995-2004 with the number of SSI accounts falling from 29.6 lakh to 18.1 lakh. Outstanding credit per account, however, has gone up from Rs 98,000 in 1995 to Rs 3.94 lakh in 2004.

No surprise

From the evidence on the table it is not surprising the Draft Paper wants priority sector lending to continue. To enhance the quantum of credit flow, the Draft Paper favours tying up "priority sector lending to the total disbursements made by banks during the previous year. The targets for banks under this system would have to be determined separately after obtaining from banks the figures of segment-wise actual disbursements during the last five years.

"However, since the system of linking priority sector lending to NBC has been in vogue since the beginning, sufficient time needs to be given to banks to change over to the new system. As such this option could be made effective from 2007-08, by which time, necessary mechanisms should be put in place by the banks."

Bankers may not relish the idea as NPAs in priority sector are on the steep side. The aggregate NPAs of public sector banks under priority sector was the highest at Rs 25,150 crore in 2002, forming 46.2 per cent of total NPAs. It came down to Rs 23,841 crore, though as a percentage to total NPAs, it stood at 47.5 per cent.

The share of NPAs under priority sector remained between 44.2 per cent (2001) and 52.5 per cent (1995) of the total NPAs for SBI and its associates, says the Draft Paper without explaining the trend.

Can or should a farmer who has lost crops over two years be treated as an NPA when corporates get loan breathers for life? If the government does not help create conditions for profitable farming, can the farmers be blamed?

Again, is that sufficient reason for banks to say bye to the farmer?

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