Watering down Priority
Sectors Advances -Depriving credit due to small farmers and Tenant Farmers
K.
Ramasubba Reddy
Abstract: Banks
are directed to extend mandatory 40% of net bank credit to priority sectors
which was initially focused on hitherto needy and neglected sections especially
to small land holders and small enterprises. Ever-since reforms have started in
90s the definitions of priority sectors have been periodically widened to
include other sections with relatively high credit worthiness and deepened to
include big loans. Thus the coverage under priority sector
lending has increasingly been diluted, crowding out small borrowers and opening
gates for big borrowers. The present paper details how the initial objective
has been diluted and defeated over a period. CIFA urges that the original objective of giving priority to small
loans be restored by doing away with the concept of indirect finance, and to
fix sub-targets for small farmers and small enterprises so as to sub-serve the
original objective.
Index: Page
1.Introduction
2. Observations in the XI Plan Document
3.Arjun Sengupta Commission Report made
trenchant observations
4. The National Commission for
Agriculture-observations
5. How the dilution and denial of credit
to the poor is done? By expanding the definition of Priority sector advances.
6. ADVERSE IMPACT ON CREDIT TO POOR
FARMERS
A) Percentage of non-institutional credit, with very high rate of
interest, is taken more by Marginal and Small Farmers
Bi)
Continuous decline in the share in amount of small Agri. Loans
Bii) Share of
Agri advances of Rs.1 Crore and above increased by 5 times ( 500%)
Biii) Decline
in loan accounts of credit limits of Rs 25,000 and less
Ci) DECLINING RURAL CREDIT/DEPOSIT RATIO
Cii) Regional Disparities
7. Diversion
of Rural Deposits to Metros
8. Decline in
rural branches Ratio
9. Adverse effects of RBI discriminatory
rural credit policy
10.
CIFA’s observations& Suggestions
1. Introduction
With
a view to extend credit to hitherto neglected sectors with higher employment elasticity and
potential, it was decided in 1985 that
Banks should extend credit to an extent of 40% of net bank credit to
priority sectors like agriculture and Small Scale Industries. Sub-targets were
also fixed details of which are given below.
Domestic
banks (both public sector and private sector banks)
|
Foreign banks
operating in India
|
|
Total
Priority Sector advances
|
40 percent of
NBC
|
32 percent of
NBC
|
Total
agricultural advances
|
18 percent of
NBC
|
No target
|
SSI advances
|
No target
|
10 percent of
NBC
|
Export credit
|
Export credit
does not form part of priority sector
|
12 percent of
NBC
|
Advances to
weaker sections
|
10 percent of
NBC
|
No target
|
{note: NBC denotes net
bank credit}
Priority
sectors initially comprised of:
(ii) Small
Enterprises (Direct and Indirect Finance)
(iii) Retail
Trade
(iv) Micro Credit:
1b)Subsequently, relatively
high credit worthy activities like housing, education, transportation and loans
to professionals have been included in the priority sector diluting the spirit of financing hitherto neglected and
needy sectors for productive purposes
Widening definition of
indirect Agri finance 1990s further diluting the scheme:
From
the 1990s onwards, the definition of what constitutes indirect finance to
agriculture has been widened and diluted drastically by the RBI. This enabled banks
to show higher level of growth of indirect finance from the mid-1990s. The
major changes introduced in the definition of indirect finance are as follows:
Up to 1993, only direct finance to agriculture
was considered as a part of the priority sector target of 18 per cent for
agriculture and allied activities. From October 1993, direct and indirect
finances have been added in the priority sector target. It was stipulated that indirect finance to agriculture only
up to one-fourth of the total agricultural advances would be considered while
meeting the priority sector target of 18 per cent for agriculture. However, the
indirect finance over and above one-fourth of total agricultural advances was
allowed to be reckoned while meeting the overall target of 40 per cent for
priority sector advances.
2. Observations in the XI Plan Document
“At present direct finance to agriculture under priority
sector lending includes credit for the purchase of trucks, mini-trucks, jeeps,
pick-up vans, bullock carts, and other transport equipment to assist the transport
of agricultural inputs and farm produce.
Direct
finance also includes credit for the construction and running of cold storage
facilities, warehouses and godowns. As alternate formal sources of finance are available for these activities, their inclusion
under direct finance for agriculture needs to
be reconsidered.”
3.Arjun Sengupta
Commission Report made trenchant observations:
A close look at RBI guide lines/directives to banks,
reveal that apathy either deliberately or by mistake also exists at the top and
policy planning level…as the credit system operating under the existing
guidelines of RBI. It emerges that
small borrowers are competing with large and strong borrowers. The coverage under
priority sector lending has increasingly been diluted, enabling big borrower
loans at the direct expense of small borrower loans.
As part of the so-called
process of” aligning bank credit to the
changing needs of the society”, the scope and definition of the priority
sector, once dominated by small farm related loans ,were fine-tuned by
including new items and enhancing credit limits of constituent sub-sectors to
more than Rs.40 lakh. Over the years
particularly after the mid-nineties, relatively high credit worthy activities
like housing, education, transportation and loans to professionals have been
included in the priority sector. This has affected unfavourably the
credit flow to the needy sector.
4. The National Commission on Farmers, headed by Dr M.S.
Swaminathan, also pointed out that removal
of the lending facilities and concessions of banks during the post-reform
period have accelerated the crisis in agriculture.
5. How the dilution and denial of credit
to the poor is done?
In 2004, the Finance Minister
announced that extension of agricultural credit was neglected in the past and
declared that farm credit will now be doubled in three years.
Doubling of credit in
three years since 2004 is achieved quantitatively but without any increase in credit to small
farmers and tenant farmers. Up
to 1993, only direct finance to agriculture was considered as a part of the
priority sector target of 18 per cent for agriculture and allied activities.
From October 1993, direct and indirect finances have been considered together
for meeting the priority sector target. About
one-third of the increase in credit flow to agriculture between 2000 and 2008
was on account of the increase in indirect finance. The sharp growth in
indirect finance in the 2000s was mostly a result of changes in definitions effected
since late 1990s. These changes broadly involved:
(a) The addition of
new forms of financing commercial, export-oriented and capital-intensive
agriculture; and
(b) Raising the credit limit of many existing forms of
indirect financing. Indeed, meeting the task of doubling agricultural credit
appears to have become much easier for banks as a result of these definitional
changes.
The entire growth of indirect finance to agriculture in the
2000s originated from a major expansion of loans with a credit limit of more
than Rs 10 crore, and particularly, more than Rs 25 crore. In the year 2000,
indirect finance with credit limit above Rs 25 crore accounted for less than
one-third of the total indirect advances to agriculture. However, in 2008, indirect finance with credit limit above Rs
25 crore accounted for nearly 55% per cent of the total indirect advances to
agriculture.
c. There was a major rise in the share of direct advances
with a credit limit of more than Rs 1 crore between 2000 and 2008. The amount of direct advances with a
credit limit of more than Rs 1 crore formed 5 per cent of total direct advances
in 2000; the share more than doubled by 2008 at 11 per cent. The share of direct advances with credit
limits “between Rs 10 crore and Rs 25 crore” as well as “above Rs 25 crore”
more than doubled between 2000 and 2008.
d. Further, the most important beneficiaries of the increase
in direct advances since the late 1990s were the big borrowers. The share of
number of loans outstanding to big borrowers under direct finance increased
between the mid-1990s and 2007-08, and the loan per account increased
phenomenally since the late 1990s.All this happened at the cost of reducing
credit to small farmers.
6. ADVERSE IMPACT ONCREDIT TO POOR
FARMERS
These changes in definition which either
widened or hiked the limits of loans, made it easy for banks to show that there
is big hike in loaning since 2004 and the task of banks to follow the
government’s directive in 2004 to double agricultural credit in three years is
made easier.
A) Percentage of non-institutional credit (Mostly from money lenders),
with very high rate of interest, is taken more by Marginal and Small Farmers
than by other farmers with larger land holdings whose share in institutional
credit, with normal interest, is more.
Size of land
holding (Ha)
Sources of loans
|
Less than 0.4
|
0.41-1.00
|
1.01-2.00
|
Above 2.00
|
Institutional
|
42.4
|
52.8
|
57.6
|
66.8
|
Non-Institutional
|
57.6
|
47.2
|
42.4
|
33.2
|
b) RICH FAMERS ARE
PREFERRED AGAINIST POOR FARMERS FINANCE AND AGRICULTURE-DECLINING TREND
EVERSINCE REFORMS ARE INITIATED
FROM 1990s
Bi) Continuous decline in the share in
amount of small Agri. loans (Rs.25,000 and less) from 59% in 1990 to 10%
in 2008.
Year
|
1985
|
1990
|
1995
|
2003
|
2006
|
2008
|
Share in
Agri credit %
|
49.60
|
58.70
|
52.00
|
23.60
|
13.30
|
10
|
About 80% Small and marginal farmers own
40% of land but small loans account for on 10% of the total agri advances.
Bii) yet,
share of Agri advances of Rs.1 Crore and above increased by 5 times ( 500%)
Amount of agri
loans (Rs.in Crores) (Accounts ,000s)
Agri Loans
|
M2006
Accounts
|
M2008Accounts
|
M2006 Amount
|
M2008 Amount
|
Small loans
up to Rs 25,000
|
1,78,00
|
1,96,20
|
22,979
|
27,987
|
Loans One
crore and above
|
7
|
10.4
|
50.969
|
73,331
|
Source: RBI-BSR
Biii) Decline
in loan accounts of credit limits of Rs 25,000 and less.
No. of year
|
A/C in lakhs
A/Cs
|
1992-93
|
267
|
2005-06
2007-08
|
178
196**
|
AGRICULTURE
** Decline by 1/4th (27%) over
92-93
Ci)
DECLINING RURAL CREDIT/DEPOSIT RATIO
C-D
ratio of All Scheduled Commercial Banks in metropolitan centres was the
highest (87per cent), followed distantly by rural centres (57 per cent) and
urban centres (56 per cent). The semi-urban centres recorded the lowest CD
ratio at 50 per cent. As of Mar 09, the credit-deposit (C-D) ratio of All
Scheduled Commercial Banks stood at 73 per cent.
During
the FY 2009, the growth of deposits and advances in metro areas was the same
rate at about 20%. In rural areas growth rate of deposits growth was 21%.
Advances grew by only 14%. In semi-urban areas while deposits grew by 24%,
and advances growth rate was only 16% and in urban areas while deposits grew
by 25%, advances grew by only 20%.
Percentage of credit given out of deposits collected
from rural and semi-Urban areas continues to be less than the percentage of
credit deployed in metro areas, indicating continued diversion of deposits
from rural and semi-urban areas for giving credit in Metro areas.
Cii) Regional Disparities
Western and southern Regions top the list with C/D
Ratio of over 85%. North-Eastern, Eastern and Central Regions are having low
C/D Ratio of less than 50%.
N1.Regon-wise Credit/Deposit Ratio as per Sanction-
As on March 09-(%)
Source: RBI-TPB March 2009
There seems to be
correlation between State Credit/Deposit Ratio and State Per capita Income as
the figures in the table below indicate.
N2.State-wise variations in
Bank Credit and Per Capita Income
* Data as on March 09, @Data as on March 08
Sources: RBI Qtly
Dep Credit, CSO NAS 2009
6.Diversion of Rural Deposits to Metros
As
of Mar 09, rural deposits were Rs 3.65 lakh crore where as credit extended
was only Rs 2.09 lakh crore. If the same Metro C/D ratio of 87% C/D
ratio were maintained in rural branches, the rural advances would have been
Rs 3.18 lakh crore instead of Rs 2.09 lakh crore. Thus a huge chunk of
rural deposits to the extent of over Rs 1 lakh crore was diverted rural area
to give loans in metro areas. Deposits from semi urban areas were Rs 5.32
lakh crore where as credit extended was only Rs 2.66 lakh crore (53% of
deposits). If the average C/D ratio of 73% were to be maintained credit in
semi-urban areas would have been Rs3.88 lakh crore instead of Rs 2.66 lakh
crore and an additional amount of Rs 1.22 lakh crore could have been
extended in semi-urban areas for agriculture and micro and small enterprises
which have higher employment potential than big enterprises and trade.
This
trend has been continuing for decades. This is inequitable and rural advances
should be at least in the same C/D ratio of Metros. The farmers could have
been saved from the clutches of the moneylenders charging high interest rate
of 24% to 36% per annum. The additional Rs 1 lakh crore loans that could have
been given for farming and running rural enterprises would have generated
twice the income and more employment opportunities than when the same loan
amount given to traders, realtors and NBFCs in Metros.
|
7. Decline in rural branches Ratio
As of Mar 09, number of Rural Branches was 31,489, semi-urban 18,764,
urban 15,325, Metro 13.478 and total number of branches 79,056. Percentage of
rural branches to total branches declined from 58% in1991 to 40% by Mar 09. Had
at least 50% of the branches are opened in rural areas, the number of rural
branches would have been 39,500; about 8,000 more branches would have been
catering to the banking needs of the rural people.
All the above data reveals that
agricultural credit for poor farmers is neglected even since 2004 also. The claim that farm credit has doubled in
three years since 2004 is also proved to be qualitatively wrong as credit to
poor farmers and rural artisans has dwindled.
8. Adverse effects of RBI discriminatory rural
credit policy
The metro
areas account for 57 per cent of total deposits as against just 9 per cent from
the rural areas. As for the distribution of credit, metropolitan group gets 57 per
cent of bank credit. Combined with the 16 per cent for the urban sector, this
means that 83 per cent of bank credit goes to miniscule metro/urban borrowers
with the rural borrowers getting just 7 per cent. The regional distribution of bank centres is no better
with seven north-eastern States together (Assam
One example starving
credit to rural and semi-urban areas is given below.
Deposits and Credit of Scheduled
Commercial Banks- MAHARASTRA STATE- March 2009 (Rs. in crore)
No. of Offices
|
% share in the total
|
Credit-Amount
|
% share in the total
|
|
Rural
|
2118
|
29%
|
14 301
|
1.56%
|
Semi-Urban
|
1397
|
19%
|
18 599
|
2.04%
|
Uraban/Metro
|
3879
|
52%
|
879 468
|
96.40%
|
Total
|
7494
|
100
|
912,368
|
100
|
Source:
RBI –Qtly Dep -Credit-Mar 09-Computed
NOTE: Major chunk of credit to the
extent of 96% of the total credit in the State is given in Metro/urban
agglomerations. A megre 4 % of the total credit is given in the rest of the
vast track of Maharastra.
The inevitable conclusion
is that all wealth and prosperity is concentrated in metro. Other areas of Maharastra State
The vast
rural belt has only 29% of the bank branches, compared to All India average of
40% rural branches in total branches. Metro has more than 50% of the total branches.
Regional Disparities in
Credit Dispensation are given in the Note at the bottom.
9 .CIFA’s observations: In post reform era, there has been studied
indifference of financing priority sectors. Neither the Government nor the RBI,
bothered to reverse the trend. The RBI also very silently re-defined definition
of priority sectors and allowed loans given to big borrowers also to be
included under this category. It is very clear that during the decade
commencing from 1993, the successive governments neglected loaning to
agriculture sector, the RBI was a party to this, wittingly or unwittingly, and
banks took cue from this and decelerated the small loans to priority sectors.
SUGGESTIONS: Provide 10% of total credit to small
farmers and twnant farmers
i)
The recommendations of NCEUS that 10% of bank credit should be given to poor
farmers should be implemented forthwith to better the lot of Marginal and Small
Farmers, who constitute 84% of all the farmers. Presently their share in agri
credit is only 4%.
ii)
Indirect finance should not be included in 18% target for agricultural credit.
Finance to the extent of 18% of bank credit should be made available as direct
agricultural finance for production and investment purposes as was the position
obtaining up to 1993. Credit limits not exceeding Rs 25 lakh should be reckoned
under this category.
Higher
credit limits exceeding Rs 25 lakh should be categorised as agri business loans
and extended as part of other business loans.
iii)
Constant effective monitoring of agricultural credit should be made by the RBI
to ensure that mandated 18% of net bank credit does reach the farmers.
iv)
As of March 2009, while Statutory
Liquidity Ratio requirement is only 24%, Investment-Deposit Ratio was 28%. Thus
a whopping sum of Rs 1.70 lakh crore is
excessively invested in government securities, instead of lending to
agriculture and small enterprises which so far received only half the mandatory
credit. This shows that all the money recently released by reducing CRR/SLR is
invested in govt securities, thus defeating the purpose of infusing additional
liquidity of nearly Rs1.70 lakh crore. This money should be used to enhance
credit to priority sectors and industry.
No comments:
Post a Comment