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LITTLE CREDIT WHERE IT IS DUE

Despite some efforts to correct the situation, problems of agricultural credit continue to persist in this country. Perhaps because the efforts have been limited to paying lip-service to the political rhetoric. This situation calls for arresting the rot of this life-support system in the agricultural sector.

The importance of rural credit derives from the primacy of agriculture in the Indian economy. Nearly 61 per cent of the working population is employed in agriculture and related professions. Unfortunately, the full potential of this sector has not been exploited by the lending agencies. Cooperative banks, commercial banks and regional rural banks have set their sights firmly on the generation of profit rather than concentrating on supporting the rural economy. The policy of interest of these banks and their quantum of credit to various sectors, and the opening of new branches and closure of existing ones are guided by commercial motives. This has affected the supply of credit to the agricultural sector, and to small and marginal farmers and other weaker sections adversely.

Very few commercial banks adhere to the rule of earmarking 18 per cent of their total lending for the agricultural sector. The situation with the cooperative banks is no better. The share of cooperative credit to this sector has fallen from 55 per cent to 45 per cent during the last couple of years.

Rural is out

The regional rural banks were established to function as “social banks” which would supplement and not supplant commercial and cooperative banks. Their performance was judged in terms of the number of persons belonging to the weaker sections who benefited, and in terms of the increase in income and employment in rural areas. These institutions lived up to that expectation till 1992, after which they began incurring huge losses. Following a government directive, the RRBs changed their policies and turned into profit-making entities by March 2003.

But, in order to earn profits, the RRBs were forced to let go of their original goal. The share of credit of the weaker sections has since been restricted to 10 per cent. Their credit-deposit ratio, once quite high, has fallen to 40 per cent. This means that a large chunk of deposits are being siphoned off from rural to urban areas. The RRBs, like commercial banks, have shifted their interior branches to urban centres, distancing the banking services from rural people. Added to this is their new-found freedom of fixing their own interest rates, worked out on cost plus principle in order to earn profits. This has resulted in the borrowing from the RRBs becoming costlier than from the other commercial banks.

Shifts in emphasis

The policies are no longer framed keeping in mind the interest of the rural masses. After tilting the functional orientation of the RRBs towards non-target group finance and commercial functioning, the government is now mooting the idea of changing their structure in terms of ownership and size. The recommendations range from merging the RRBs with their sponsors to form a national rural bank. But such a merger would be difficult. The government is therefore focussing on alternative remedies, including reducing the number of RRBs by expanding the area of operation of each RRB. These branches can be closely integrated under a single agency instead of each bank going its own way.

If the formation of a national rural bank is not acceptable, the rural branches of all banks can be merged with the National Bank for Agriculture and Rural Development, which will function as the specialized agency for credit instead of being just an intermediary. With the merger of rural branches the benefit will go to the people directly.

These revamping and consolidation measures are, however, no panacea for the existing problems. Piecemeal experiments which can do nothing to eliminate the redundant agencies are likely to aggravate the situation further. What is needed is a review of the entire approach to rural credit.

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