Chennai, Jan. 30
IT appears that the Union Government's directive to banks on agricultural credit growth was not merely a statement of pious intentions.
It has also started cracking the whip. The result is very visible a substantial increase in disbursements to the agricultural sector in the case of almost all public sector banks, especially the larger banks. Growth in the portfolio of agricultural advances is higher than the overall growth in advances for most banks in the period between April and December 2004. In the case of a few banks such as Allahabad Bank and Corporation Bank, disbursements during this period have flared up by more than 100 per cent.
Ask bank chairmen, if there was any Government pressure, and the answer is a predictable "No." Some blandly suggest that while banks focused on retail lending in earlier years, they have now shifted attention to agriculture. The restructuring of agricultural loans permitted by RBI has also added to the outstanding, says Mr B. Swaminathan, Executive Director, Canara Bank. Good monsoon in several States has also helped banks disburse more to the agricultural sector, he added.
So, why didn't banks do it earlier? Mr V. Sridar, Chairman and Managing Director, UCO Bank, candidly admitted that public sector banks had no defence on the issue. Aren't agricultural loans risky? Accepting that the risks were higher, Mr Sridar still contended that the interest rates on such loans (in the range of 9 to 11 per cent) adequately compensated for the risk involved. That view is seconded by Mr V.K. Chopra, Chairman and Managing Director, Corporation Bank. Mr Sridhar, however, warned that banks couldn't afford to be reckless about these loans.
A top economist was far less sanguine about these developments. He felt that higher disbursements would increase the risk of the overall advances portfolio. Despite the higher interest rates on these loans, the eventual return may not be attractive if banks did not carefully cherry-pick their customers, he said.
He opined that transaction costs are higher in the case of these advances since the loans are in smaller lots. Besides, in case of an external threat, such as a failed monsoon, advances to an entire region will turn bad, he added. According to him, larger banks are relatively better off, as they can diversify across regions. By the same yardstick, regional banks would be vulnerable, if they restricted their advances to a particular region.