By K Yatish Rajawat
In her FY22 Budget, FM Nirmala Sitharaman announced two certain reforms for the banking sector. A new ARC and AMC to residence some of the NPAs and bringing back term-lending domestic economic institutions (DFI). These measures are targeted at enhancing credit development and flow. DFIs are more crucially targeted at reviving project finance hopefully, lessons from the previous will be discovered and applied in its design and style. Besides, there are some sectors that require directed credit: custodian banking (bit.ly/2Z9m3cB) and agriculture.
Credit is about danger distribution, experience to strengthen availability and margins. For a lot of decades, governments adopted a policy of pushing credit into ‘priority sector’with tardy outcome and diversion of credit. Sadly, even just after 3 decades of priority sector lending directives and tardy overall performance by banks, not one bank has been penalised for failing to meet these targets. Instead, they are asked to invest in the Rural Infrastructure Development Fund managed by Nabard—a mockery. Anecdotal encounter points out that branches in aspirational districts have not disbursed priority sector loans for years collectively.
Instead of pushing and forcing PSBs to lend to the rural sector, the policy has to make lending desirable, and the only way is to enable specialised agriculture banks.
While PSBs have had an impressive record of deposit mobilisation and geographical spread, sector experience for danger assessment or lending to little borrowers in agriculture, MSME, or even the informal sector has not been created.
Corruption and the absence of systemic credit danger assessment, combined with a herd mindset to lending, specifically to corporate borrowers, has resulted in an NPA pile-up. Why is that all PSB have the exact same set of corporates as NPAs? The most plausible explanation is that either equivalent tools and solutions are made use of for danger profiling, or every person is copying the lead bank model. There seems to be a systemic flaw in evaluating the danger profile or a lack of experience in judging dangers from specific sectors.
The agriculture sector also has higher NPAs and suffers from poor development. Nabard, the nodal agency for agriculture banking, claims that in FY20, banks disbursed Rs 13.73 lakh crore as ground-level credit to agriculture, surpassing the government’s target of Rs 13.50 lakh crore. However, these ‘managed’ achievements are meaningless, as they do not reflect the accurate image, which is why agriculture’s overall performance or farmer’s revenue does not have any correlation with the increasing credit. Funds directed to RIDF do not attain the farmers—they are disbursed to state governments.
This raises a couple of queries: one, is the agriculture sector’s credit becoming made use of for intended purposes? If not, is interest subvention the cause for the diversion and arbitrage? What is the institutional remedy to this challenge?
Over the final 4 decades, agri-credit has multiplied more than 1,000 instances. However, as a percentage of the agricultural GDP, which must be the actual measure of agri-credit development, the rise has not been smooth. For instance, throughout the pre-reform period (FY72 to FY90), direct agri-credit flow as a percentage of agri-GDP improved at a modest typical annual development price (AAGR) of 4.2%. However, from FY91 to FY00, AAGR decelerated to 3.2% per annum. But, amongst FY01 and FY08, it witnessed tremendous development of 12%, only to fall back to just 3.6% amongst FY09 and FY18.
The enormous development amongst FY01 and FY08 can be attributed to Kisan Credit Card (KCC), introduced in 1998 and the Interest Subvention Scheme, which incentivised quick-term credit for crops. The slowdown just after FY08 seems to be due to a loan waiver scheme, which led to a halt in lending. Bankers feared that farmers loan waivers designed moral hazard.
Interest subvention scheme was introduced in 2006 to provide crop loans at 7% interest, and 4% for these who paid back their loans consistently. Micro-finance institutions and dollars lenders prices variety amongst 18 and 36%. However, this has led to diversion for non-agriculture purposes. Apart from KCC, significant farmers take agri-credit in crores of rupees at 9-10% interest, and re-lend to little farmers at 36%. Sometime they even deposit the dollars in fixed deposit of exact same branches.
The diversion of agri-credit to non-agricultural purposes can be estimated by hunting at agri-credit as a percentage of the worth of input specifications. The total quick-term credit to agriculture and allied sectors, as a portion of input specifications, GVO-GVA, was substantially above one hundred% for a lot of states: Kerala (326%), Andhra Pradesh (254%), Tamil Nadu (245%), Punjab (231%), and Telangana (210%). The apparent cause for this diversion is the low-interest price, which gives ample chance for arbitrage.
Another fascinating function is that in the total direct credit (outstanding) to agriculture and allied sectors, the share of quick-term credit witnessed a considerable jump from 44% in FY82 to 74.3% in FY16 whereas, somewhat worryingly, the share of lengthy-term credit fell from 56.1% to 25.3%, respectively. Banks are reluctant to provide lengthy-term credit for agri-implements and tractors, as 95% of agri-implements and tractors are becoming financed by NBFCs at larger interest. This reality is substantiated by tractor companies off the record on-record visibility comes from their personal NBFCs being the biggest provider of credit to farmers.
Since lengthy-term credit is fundamentally for investments and capital formation, this dramatic fall in the share of credit requires a heavy toll on farm productivity and the all round development of the agri-sector.
If PSBs are not following directives of PSL, if most of the funds are receiving diverted to RIDF and Nabard, and if farmers continue to borrow at higher-interest prices, it is time that RBI appears at differentiated banking licences for the agriculture sector. There will be a lot of takers for serving the rural sector who will do a improved job of supplying and spreading credit for a great deal-necessary reforms such as crop diversification.
The author is Public policy specialist tweets @yatishrajawat