Restructure Credit Policy To Uplift Weaker Sections

Easing credit constraints for the poorest and the weakest must be a priority to reinforce and sustain their health status.

The government is, ostensibly, ensuring that credit priority, as spelt out and implemented by RBI, is aimed at precisely this. Credit is a key input into agriculture & allied activities and for many small and micro enterprises run by the section that forms the country’s 30-crore unorganised workforce.

Ensuring that access to constraint-free and timely credit is widespread and functioning efficiently in the rural areas becomes urgent against the new economic policies that destabilise their existing modes of livelihood, including widespread acquisition of arable land for SEZs and liberalisation of the retail sector in food.

As crucial would be professional advise on new investments to ease the rigours of a livelihood switchover by building an effective social security net, since the in-depth impact of such policy-inspired livelihood destabilisation would only be visible over a period of time.

Arjun Sengupta-led National Commission for Enterprises in the Unorganised Sector (NCEUS), which submitted its report to PM Manmohan Singh recently, has delivered a scathing indictment of the RBI’s priority sector lending policy (PSLP) commitment to weaker section credit.

Here is an unwittingly state-sponsored, kid gloves-off critique of a deliberately lopsided policy, which has been designed, not by branch managers and loan officials, but by the decisionmakers at the top of RBI to benefit what could only be a travesty of the phrase ‘weaker sections’, NCEUS has asserted.

Stopping just short of calling it a sham in terms of virtually every fundamental count, it has criticised recent policy changes that have shortened the period for declaring a loan an NPA, which can spell death knell to many one-person enterprises in the unorganised sector.

A tawdry application of the mind is evident in RBI’s own PSLP, which has set a target of 40% of the adjusted net banking credit (ANBC) for priority sector lending by banks. Of the 40%, 18% target has been set for agriculture and another 10% has been set for weaker sections.

The fault, NCEUS has charged, lies with RBI credit policymakers, who refused to reduce the 40% (of ANBC) target set for priority sector lending despite the difficulties of banks in achieving it and attendant Narasimham Committee recommendations, mainly due to political compulsions.

What the authorities did, instead, was to ”nullify, through the back door, the operational relevance of the priority sector target by including many items, which can be conceived of as belonging to the weaker section borrowal of small loans who would not possess other bankable projects and who would otherwise face difficulty in getting bank credit...” They diluted the definition of priority sector to suit the achievement of statistical targets.

Diversion of unachieved disbursals under to NABARD’s RIDF and SIDBI have helped banks show lending target achievements for the priority sector on paper. Quoting RBI’s latest report on trend and progress of banking in India 2004-05, NCEUS has pointed out that it “speaks volumes of the extent to which coverage under PS lending has increasingly moved away from the original intentions of the programme”.

Banks, the panel report points out, are not interested in making advances to unorganised sector borrowers in the absence of collateral, irrespective of what RBI guidelines say. They openly subvert and ignore guidelines that say no collateral for loans up to Rs 5 lakh.

According to Rural Finance Access Survey of WB and NCAER (2003), a majority of the loan extended by commercial banks, RRBs and cooperative banks are collateralised with 89% of the households surveyed who borrowed from RRBs and 87% who borrowed from commercial banks, reporting that they had to provide collateral.

Also, small borrowers are forced to compete with small and large borrowers since the credit system operates under the existing RBI guidelines. RBI’s PSL guidelines of April 30, 2007, prove, NCEUS has said, that in the agri sector, too, the small or poor farmer has to compete with large and strong borrowers such as corporate houses, traders and institutions. In 2003-04, 70% of the total priority sector credit for agriculture from scheduled commercial banks (SCBs) went to the relative fat cats.

Small and marginal farmers — although they account for 83.9% of the total farmer households and operate in 43% of the total farmland — received only 30% of credit to agriculture.

In that year, SCBs advanced about Rs 96,000 crore to the agri sector. Of this, marginal farmers received only Rs 15,000 crore and small farmers only about Rs 14,000 crore. What’s worse is that the percentage break-up in credit to different segments of cultivators in agriculture has remained the same since 2000-01.

Ditto situation pertains to the education and housing sectors. “Here, again, it is evident that due to dilution of PSL policy, the poor are competing with comparatively stronger claimants. Such a PSL guideline has made a mockery of the weaker sections,” NCEUS has held.

Nor have interest rates for the weaker sections been lower and easier in practice. On paper, the rate of interest on agri credit up to Rs 3 lakh is 7% and unorganised enterprises have to pay an interest of 9.5% (2% lower than PLR). However, a plethora of service charges levied by banks hike the total cost by another 2%.

This, even while large industries often have to pay an interest rate lower than PLR on account of “better credit worthiness”.

These costs become so high that in spite of comparatively lower rates charged by formal institutions, they work out often higher or equal to the informal rate. Hence, asserts the commission, small borrowers prefer informal channels (money lenders, etc) since they take on the spot decisions.

Poor institutional infrastructure available for credit has made the matter worse. Add to that the loss of momentum in distribution of bank credit to small borrowers from 21.2 million additional bank accounts by SCBs, of which 93.1% were accounts with Rs 10,000 or less of credit limits in the 1970s.

Between March 1992 and March 2001, there has been an absolute decline of about 13.5 million in aggregate bank accounts due to a much larger decline of 25.3 million accounts for the redefined small borrowal accounts of Rs 25,000 or less.

In recent years, the number of commercial bank branches in rural areas declined from 35,134 in March 1991 to 30,572 in March 2006. Many vacancies remain unfilled in rural areas and new-generation banks have been hiring employees on contract. “These unhealthy practices could prove to be counterproductive to the long-term credibility of banking institutions,” NCEUS warns.