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Get into non-fund businesses, raise CD ratio to 80%: Panel

Our Bureau

Mumbai, July 27 An expert committee looking into operational efficiency of Regional Rural Banks (RRBS) has recommended that they move away from crop loans to assisting the trade, housing and rural infrastructure.

“If the RRBs have to make profit on a sustainable basis, they have to tread a new path with regard to their business portfolio,” said the RBI task force in its recommendation today.

The committee has noted that RRBs are doing only a fifth of the volume of business that their commercial banking peers even though they have a comparable branch network & service area in terms of the number of villages.

It has also gone to recommend that they should get into non-fund businesses. “The RRBs should be permitted to take up issuance of bank guarantee, extending financial assistance to the trade and services sector, extending financial assistance for housing, village infrastructure and participation in consortium advances,” the committee has said in its report.

The recommendation has also asked for the removal of restrictions of financing only target groups which will require an amendment to Section-18 of chapter-IV of the RRB Act 1976.

The RRBs have also been advised to increase the credit-deposit ratio to 80 per cent by 2008. They should lay a greater emphasis on providing financial assistance for education of the individual and for setting up of educational institutions in the rural areas. It has been recommended that 60 per cent of the RRB advances may be channelised to the priority sector while 40 per cent to non-priority sector including commercial lending and at least 40 per cent of aggregate credit for agricultural purposes.

“With regard to advances portfolio, it is seen that majority of the RRBs and rural banks are tilted towards low earning activities and easy businesses which can be done without any effort like loans for retail trade, small business, housing repairs and salary earners,” the report added. While agriculture accounts for approximately 90 per cent of the advances portfolio, crop loan accounts for nearly 7 per cent.

The recommendation said the crop loan portfolio of RRBs should not show excessive slant towards fine cereals as “they are not only losing their sheen as default proof advances due to progressive dismantling of MSP but also the recent non-hesitancy on the part of Government in importing foodgrains mainly to keep the consumer happy.”

In that event, with the stagnant productivity in those crops, the excessive loaning given may prove to be futile and the advances may turn Non-Performing Assets.

More Stories on : Regional Rural Banks | Credit Market

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Shift tack for boosting business, RRBs told

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