Bank Reforms in India: The Effect on Farmers
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.