Banking on ‘nobody’s child’ schemes

It's not people who aren't credit-worthy. It's banks that aren't people-worthy.

Muhammad Yunus, Nobel Prize winner and Micro-credit pioneer

Once upon a time, there was a Government of India programme for lending to the poor, called the Differential Interest Rate (DIR) scheme. Under it, domestic commercial banks were mandated to lend to low-income groups at an unbelievably low interest rate of 4 per cent per annum for productive endeavours.

Introduced in 1972, just three years after the first round of bank nationalisation, the DIR scheme was targeted at the so-called bottom-of-the-pyramid. The Reserve Bank of India issued instructions to banks to set a target of lending one per cent of their total advances outstanding at the end of the previous year, under the scheme. But as it nears the 40{+t}{+h} anniversary of its launch, it remains what the Beatles would call a ‘Nobody's Child'.

DECADES OF NEGLECT

While the legacy of Ms Indira Gandhi — whose birth anniversary falls today — is controversial, her 20-point programme, introduced the very year she imposed the dreaded Emergency, is something that one must, however, give credit to for laying emphasis on banks meeting their loan targets under DIR. At least as late as 1987, when this writer was a field officer of a public sector bank in a rural branch in Kerala, the scheme was closely being monitored with branch-wise targets and periodic reviews. It was even part of the internal performance review processes conducted at the head office level of banks.

But now it seems a forgotten story, because of both lax official oversight as well as waning commitment among bankers to schemes of this sort. Interestingly, though, the regulatory target for DIR loans stays at the original one per cent of the previous year-end credit outstandings; the relevant circular hasn't been withdrawn so far.

Going by the total outstandings of Rs 41,03,566 crore as on March 31, 2011, domestic commercial banks ought to have lent out more than Rs 41,000 crore under DIR, of which the public sector banks' share alone would have been Rs 33,000-odd crore. Unfortunately, figures relating to the actual exposure aren't publicly available. But the best of guesstimates would put the outstanding DIR loans at not even Rs 10,000 crore. Compare this figure with the Rs 22,000 crore or so of outstanding credit extended by registered micro-finance institutions (MFI), who are largely private players and, moreover, new entrants into the organised rural lending space. The fact that the MFIs have cornered so much of business in a short span of time only shows the huge vacuum that the country's mainstream commercial banks have left for others to fill.

That raises the question: Why is such an important anti-poverty loan scheme languishing when it can hardly be claimed that the desired objectives of poverty eradication and improvement in the quality of life of the aam aadmi have been met, even remotely?

Part of the answer could lie in the unviable parameters of the scheme, where the rate of interest has continued at 4 per cent without any attempt at a realistic revision, taking into account the actual field-level experience of the last 40 years! How can any scheme remain largely immutable and static for four decades, which has been in the case of DIR? It took more than 30 years, in 2007, to even revise the limits for loans under DIR, from Rs 6500 to Rs 15,000 per beneficiary. Again, for eligibility, the annual family income limit was revised in 2008 after a gap of 22 years — from Rs 6,400 to Rs 18,000 in rural areas and from Rs 7,200 to Rs 24,000 in urban areas. In others words, a monthly family income of 1,500-2,000!

In his celebrated book, Banker to the Poor , Muhammad Yunus, the founder of Bangladesh's Grameen Bank, has provided a moving account of people whom he calls ‘the banking untouchables”, created by a commercial banking system that practises “financial apartheid”. He sums up the institutional bias against the poor when it comes to credit with the following quote: “The more you have, the more you get. And conversely, If you don't have it, you don't get it”.

MGNREGA MONEY AS COLLATERAL

With creative tweaking, one could do a lot to make the four-decade old DIR scheme into a powerful instrument to better the lives of India's poor. For example, there could be a coupling of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the DIR scheme. Assuming an average minimum daily wage of Rs 130 under MGNREGA — which entitles adult members of every rural household to 100 days of employment in a year — it would entail a guaranteed annual income of Rs 13,000 for a family. It is possible for banks to lend to poor households under DIR against the security of their cash receivables from MGNREGA and even raise the loan amount to, say, Rs 20,000 with soft terms of repayment (up to 36 months so that the repayment load doesn't become unbearable) and at fair rates of interest of 11-12 per cent.

Such tweaking could open up new opportunities for banks to lend, whether for production or for consumption, to the poor, even while rescuing the DIR from its ‘Nobody's Child' status. As regards concerns on loans being made for ‘productive' purposes, one may look at the banks' own existing personal loan schemes tailored to meet the consumption needs of ‘salaried' regular-income employees in the organised sector. At least from a risk-mitigation standpoint, banks would have little to worry if wages payable under MGNREGA flow through the borrowers' accounts with them. In all, it would ensure ‘financial inclusion' in a substantial sense.

Incidentally, the Centre's budgeted outlay for MGNREGA in 2011-12 is Rs 40,000 crore, which is close to the outstanding exposure that banks ought to be having under DIR. With 45 million households covered under the MGNREGA, the potential for inclusive banking by coupling it with a redesigned DIR is obvious. There can be similar imaginatively conceptualised and refined versions of schemes such as DIR that can go a long way in bettering the conditions of both the rural and rural poor.

It is heartening in this context to take note of the RBI Governor, Dr D. Subbarao's voicing concern — at an international conference earlier this week — regarding the Indian financial sector not having a pro-equity bias, and the need for regulation to encourage “socially-optimal business behaviour”. He probably hasn't spoken too soon.

(The author is with State Bank of Mysore. Views are personal.)

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