It
is now widely recognised that access to credit is critical
for cultivators operating in a market setting. One of
the important - and moderately successful - aims of
bank nationalisation more than 30 years ago, was to
provide institutional credit to agriculture, which until
then had been severely neglected by bankers.
Agriculture and small industries were made ''priority
sectors'' for lending by banks, and there was an effort
to increase the spread of rural banking by increasing
the number of branches. The success of policy in terms
of branch expansion, mobilisation of household savings,
diversification of lending targets and direction of
credit to the priority sectors was substantial.
Among the directed credit programmes followed by the
banks, priority sector lending has been perhaps one
of the most effective. In 1969, banks provided only
14.6 per cent of their total credit to the priority
sectors, with the percentage of credit disbursed to
agriculture being only 5.4 per cent. In 1991, 40.9 per
cent of net bank credit was advanced to priority sectors,
and total credit to agriculture, even though remaining
below the prescribed level of 18 per cent, was 16.4
per cent by 1991.
Nevertheless, in the 1990s the banking sector in India
was being criticised for inefficiency, on the grounds
that the level of non-performing assets (NPAs, or those
loans which are unlikely to be repaid) was too high
and that profits were too low. Such criticisms were
used in the Narasimhan Committee Report, to argue that
the policy of directing credit towards priority sectors
should be reconsidered and that the proportions of such
credit should be reduced.
The Committee recommended that the system of administered
interest rates be dismantled in a phased manner and
that interest rates should be more determined by the
market. The Committee also suggested that banks should
not be pressurised to open rural branches and that banks
should be allowed to close non-profitable branches.
These suggestions were based on an assessment of the
performance of rural banking, which was not justified
by the actual experience. In fact, over the 1990s, the
share of the priority sectors in total NPAs of public
sector banks was declining. Also, NPAs resulting from
small advances (i.e. where outstanding bank loans amounts
to Rs. 25,000 or less) have been declining and that
too quite sharply in relative terms.
In
spite of this, the argument of high NPAs was used to
encourage banks to cut back on lending to the priority
sector. Therefore, since 1991, there has been a reversal
of the trends in the ratio of directed credit to total
bank credit and the proportion thereof going to the
agricultural sector, even though there has been no known
formal decision by government on this score. At the
same time, serious attempts have been made in recent
years to dilute the norms of whatever remains of priority
sector bank lending.
While the authorities have allowed the target for priority
sector lending to remain untouched, they have widened
its coverage. At the same time, shortfalls relative
to targets have been overlooked.
In agriculture, both direct and indirect advances to
agriculture were clubbed together for meeting the agricultural
sub-target of 18 per cent in 1993. The definition of
priority sector itself was also widened to include financing
and distribution of inputs for agriculture and allied
sectors (dairy, poultry, livestock rearing) all short-term
advances to traditional plantations including tea, coffee,
rubber, and spices, irrespective of the size of the
holdings.
Apart from this, there were also totally new areas under
the umbrella of priority sector for the purpose of bank
lending. These included lending to the Rural Infrastructure
Development Fund of NABARD as well as to State Financial
Corporations. Recently even software and bio-engineering
have been included under priority sector. This has allowed
banks to include all manner of loans to different sectors,
and treat such investments as priority sector advances.
This is the only reason why priority sector lending,
which was falling as a share of total bank lending between
1991 and 1996, has subsequently been above the target.
While total priority sector lending has increased, loans
to agriculture have declined, and are now well below
the target of 18 per cent of net bank credit. In the
year ending March 2003, direct agricultural advances
amounted to only 11 per cent of net public sector bank
credit.
Private banks in general and foreign banks in particular
have been the worst performers in this regard, and have
been very lax in meeting regulatory norms. Once again,
the sector most affected was agriculture. Direct agricultural
advances were only 6.3 per cent of net private sector
bank credit in 2002-03.
The difficulty is that even public sector banks are
being forced to respond by cutting costs and trying
o improve profitability in competition with private
banks. They are trying to trim operating expenses, by
reducing the wage bill by reducing employment through
retrenchment under the VRS scheme and computerisation.
They are also seeking to reduce costs by limiting branch
expansion and reducing the number of bank branches.
The latter, which affects the rural areas first, reduces
access to credit in rural areas that were well-served
by the post-nationalisation branch expansion drive,
and worsens the tendency towards reduced provision of
credit to the agricultural sector.
In consequence of all this, the formal credit squeeze
upon Indian agriculture is now acute. This has led to
severe problems of accessing working capital for cultivators,
and has also meant the revival of private moneylending
in rural areas. Such retrogression has extremely disturbing
implications for the current conditions of farmers,
as well as for the future of Indian agriculture.
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