Dr. Kotaiah, Mrs. Nandita Ray,
Mr. C. S. Reddy, Prof. Mahendra Dev and Distinguished guests,
I am grateful to the organisers
for giving me an opportunity to deliver the first Smarajit Ray memorial lecture.
Mr. Ray, about a couple of years younger to me in age and a valued colleague
in the civil service, had been one of my close friends for almost four decades.
He was a self-effacing person with courage of conviction in servicing the cause
of the poor with great integrity and objectivity. I also happen to know his
wife, Mrs. Nandita Ray, particularly in terms of her association with the Centre
for Economic and Social Studies. Together, they worked for a better society
and the betterment of the downtrodden. Given his simplicity and humility, it
was difficult for many to believe that Mr. Ray had been a student of the elite
Presidency College, Kolkata; Delhi School of Economics and London School of
Economics. It is said that he inherited his courage of conviction from his father
Mr. Ranajit, who was also of the Indian Civil Services.
Since this is the first in the
series of lectures, I will recall in brief Mr. Ray’s major achievements.
First, and perhaps the foremost
is his pioneering role in the development of women’s help groups in Andhra Pradesh,
which led the SHG movement to become the most impressive mass movement in this
area.
Second relates to his innovations
in the organisation of the drought prone area programme, specially in terms
of people’s participation.
Third is his contribution to the
programme of "back to school" which specifically targetted the children
who were school dropouts and majority of whom were scheduled castes in the rural
areas.
Fourth, he prepared a useful document
on integrated irrigation management and also helped in resettlement and rehabilitation
of the project oustees.
Fifth, he helped to set up the
Environment Research and Training Institute, which focused on consultancy, and
training in a wide range of environment-related issues – perhaps, the first
of its nature at the State level.
I have been a silent admirer of
his contributions and achievements in these diverse fields. However, I had a
closer interaction with him in my personal and professional capacity very recently.
He visited Mumbai in March 2005 to attend the Sachin Choudhury memorial lecture
and at that time, I spent almost a full day with him, both in my office and
at home. I was deeply impressed by his commitment to issues relating to micro
finance. This prompted me to follow it up with a meeting with all people concerned
with the micro finance movement involving NGOs in Andhra Pradesh at the Reserve
Bank of India, Hyderabad in June, 2005. Mr. Ray helped in organising this meeting,
which gave me a deep insight into the issues involved. In a sense, therefore,
Mr. Smarajit Ray was a catalyst for my getting deeply involved in the matters
relating to micro finance and thus, both RBI as an institution and I, at a personal
level, are, therefore, indebted to him. This first memorial lecture is, thus,
our way of acknowledging the inspiration that we derived from his personal conduct
and his professional work.
Considering the deep interest that
he had shown during his life time and the relevance of that work to the RBI,
I have chosen to speak on the subject of Rural Banking. After a brief review
of the past and recent efforts, the current perceptions on outcomes are noted.
I will then mention the national policy directions, followed by, what I would
call, New Realities. I will conclude the lecture with a few issues that need
to be addressed in the days ahead.
Review of efforts
It is useful to recall that rural
banking was traditionally a monopoly of the money lenders, till the colonial
government enacted Co-operative Societies Act in 1904 with a view to making
the co-operatives as premier institutions for disbursement of credit. The Process
of a three-tier structure commenced in 1915. Government was also providing agricultural
loans usually called Takkavi loans, which have since been discontinued. The
RBI Act vested a unique responsibility of rural credit to the central bank.
All India Rural Credit Survey (1951) of the RBI opined that the co-operatives
were "utter failure" in providing rural credit, but added they had
a vital role in agriculture credit. The Imperial Bank was nationalised as SBI,
which was visualised as a vehicle for rural banking. A rural credit survey of
1966 also concluded the ineffectiveness of co-operatives but stressed the importance
of their succeeding. Many State governments legislated the registration and
regulation of money lenders but with little emphasis on implementation. Nationalisation
of banks in 1969 gave a boost to expansion of banks and banking in rural areas.
The Reserve Bank hived off a part of its role in agricultural credit to a separate
national level institution, viz, Agriculture Refinance and Development Corporation
(ARDC) in 1975. Soon thereafter, a legislation was enacted to create Regional
Rural Banks, with participation from Central and State governments and the nationalised
banks, which have their network spread almost all over the country. Subsequently,
the ARDC was converted into NABARD, which continued to get the lines of credit
from the World Bank. The World Bank’s lines of credit were, however, discontinued
on the ground that functioning of co-operatives had been less than acceptable.
Simultaneously, the directed credit in the form of priority sector lending continued
and the administered interest rate regime lasted.
During the reform period, capital
was infused into the RRBs and the NABARD. While the priority sector lending
continued, the administered interest rate regime was dismantled. To make up
for the shortfall in the priority sector lending by the banks, the Rural Infrastructure
Development Fund (RIDF) was initiated to ensure the envisaged flow of bank resources
to agriculture through the intermediation of the NABARD and the State governments.
A system of Special Agricultural Credit Plan was also introduced. Innovations
in the area of rural credit included Kisan Credit Cards and encouraging bank-SHG
linkages. It may also be of interest to note that many District and State Co-operative
Banks are yet to meet the applicable minimum capital requirements.
More recently, since 2004, vigorous
efforts have been made to more than double the credit flow to agriculture. Emphasis
has been laid on sound credit culture, effective credit delivery and appropriate
credit pricing. New instruments for financial inclusion such as General Credit
Cards and no-frills accounts were initiated. Micro finance programme was intensified
and new guidelines for business-facilitator model were issued. Use of technology
for rural banking is being encouraged. Special Area Plans for banking in several
states such as Uttaranchal, North Eastern States, Chattisgarh, Bihar and Andaman-Nicobar
have been formulated to suit the local conditions. In terms of institutional
development, consolidation of the RRBs, revamping of the urban co-operative
banks as per the vision document, revival of rural co-operative credit structure
as per the Vaidyanathan Committee recommendations, a plan for restructuring
of long-term lending institutions for agriculture, and a revisit to the prescriptions
relating to the priority sector lending are underway. While a Working Group
to review the legislations of various States in regard to money lending has
been formed, another Working Group is looking into the relief measures for the
distressed farmers. Above all, as per the Government of India announcement in
2005, it has been decided to subsidise the commercial banks and NABARD to enable
provision of short-term credit at 7% interest rate to the major segment of the
farmers.
In brief, there have been vigorous
and determined efforts towards expansion of rural credit, especially through
rural banking.
Current perception of outcomes
The litmus test of any effort
is the outcome, and perhaps even more important, the perceptions of the outcomes.
These can be summed up as follows.
First, the non-institutional
credit still continues as far as rural areas and agriculture sector are concerned.
Second, the credit-deposit
ratio shows that despite the intermediation of banks, the ratio continues to
be low in the rural area.
Third, the all-in costs of
credit from banks, after factoring in timeliness, transaction-costs, access,
etc, appears high for agriculture relative to private corporate sector even
after accounting for the risks as reflected by the level of actual non-performing
assets.
Fourth, the performance of
some of the public sector banks in rural and agricultural lending is also inadequate
while that of most of the private and foreign banks is even lower, despite considerable
expansion of the scope of priority sector lending
Fifth, credit-system in rural
areas finds it difficult to cope with the rising demands of commercialised agriculture
and in any case, there are few credible risk-mitigation measures for the borrowers
resulting in greater distress to the farmers in areas with significant presence
of commercial crops.
Sixth, while there has been
notable progress in micro finance, it is, mostly confined to the states with
fairly well-developed banking system. Further, the cost of credit at around
20 to 30% also appears high.
Seventh, the co-operative credit
system is, in most parts, dormant and it is commented that the three-tier structure
helps finance the bureaucracy rather than benefiting the farmers. Similarly,
in many parts of the country, RRBs are less active though in some others they
are expanding.
Eighth, while there has been significant
growth in rural credit in the recent years, its medium-term sustainability is
contingent upon growth in agriculture and improvements in the institutional
settings.
In brief, the perceptions on the
outcomes of vigorous and varied efforts to expand the reach of rural banking,
seem to be less than expected.
Perhaps it is time we ask ourselves
some questions.
First have our strategies, in terms
of institutions and strategic directions, been flawed all along? Have we run
out of ideas in this regard? Is our thinking on rural credit has fallen behind
the emerging realities in the economy? Is there a need for distinguishing between
the cause and the effect as also between the symptom and the disease? Is it
lack of credit availability or want of commercial viability of agriculture that
is constraining the credit-flow, or is it a complex combination of both? While
we may not be able to answer many of these questions satisfactorily, I submit
that we need to keep asking these right questions.
New Policy Directions
Answers to some of the
complex questions relating rural credit may be found in the most recent policy
directions. The National Development Council approved a week ago "An Approach
to the 11th Five Year plan" which contains extensive references
to the future policy directions. Some extracts from the document may be in order.
On objectives and challenges
"One of the major challenges
of the 11th Plan will be to reverse the deceleration in agricultural
growth from 3.2% observed between 1980 and 1996-97 to a trend average of around
2.0% subsequently".
"To reverse this tend,
corrective policies must not only focus on the small and marginal farmers who
continue to deserve special attention, but also on middle and large farmers
who suffer from productivity stagnation arising from a variety of constraints".
"A second green revolution
is urgently needed to raise the growth rate of agricultural GDP to around 4%"
On financing development
"The 11th
Plan must ensure that our policies are sufficiently flexible to support the
development of micro finance. Interest rates in the micro finance sector have
to be significantly higher than in the banking sector reflecting the much higher
cost of doing business. It is important to remember that most micro-finance
institutions charge rates which are much lower than rates charged by money lenders".
On agriculture sector policy
"The failure of the organised
credit system in extending credit has led to excessive dependence on informal
sources usually at exorbitant interest rates. This is at the root of farmer
distress reflected in excessive indebtedness".
"There is evidence that
farm debt is increasing much faster than farm incomes and the larger issue of
the overhanging debt stock, as distinct from credit flow, has not even been
on the agenda except of a few State governments. Admittedly, there are limits
to the extent that banks can be expected to play a purely social role in today’s
more competitive environment. However, too conservative an approach on settling
debt that has turned bad, due to contingencies of poor weather or prices, is
not even prudential banking if this serves only to show bank balance sheets
to be better than they are, and prevents profitable new lending. There are several
suggestions, ranging from a Stabilisation Fund to be run by the Centre for automatic
write-off under some specified conditions, to the setting up by States of standing
professional Debt Commissions to examine individual debt (including to non-institutional
sources) on a case-by-case basis for one time settlement. The 11th
Plan will examine in details the impediments which now stand in the way of social
and developmental banking and suggest innovations that can improve access and
speed up one-time settlements while maintaining credit discipline and financial
prudence".
"As farmers adopt new
and untried technology, and increase input intensities, they also face larger
risks."
"These and related issues
of risk management are again largely non-plan areas but need to be addressed
during the 11th Plan. This should ideally be done by concentrating
on innovations in design which could help expand insurance in a manner that
is financially viable without excessive subsidy."
It is also useful to extract
some of the statements of Prime Minister Dr. Manmohan Singh, on the subject
in the meeting of National Development Council on 9th December 2006.
"The 11th Plan
must give top priority to redressing the weaknesses in the agricultural sector.
Growth in the agricultural sector has been less than 2% per annum since the
middle of the 1990s. With about half of the rural population still dependent
on it for most of their income we cannot expect inclusive growth if we do not
revitalise agriculture. It is important to recognise that the problem is not
distributional, with the better off farmers doing well while the small farmers
and the landless face hardships. Though the weaker groups clearly face more
difficulties and need special attention, agriculture as a whole is in crisis.
We should, therefore, focus on achieving higher productivity and incomes for
all farmers in both crop and non-crop agriculture."
"The Approach Paper calls
for corrective action in several dimensions of agriculture. Water is a critical
input for agriculture and we need to re-examine all aspects of the water economy.
We are not spending enough on irrigation and what we are is not being utilised
efficiently."
"In addition to investment
in irrigation, we must take steps to conserve water and promote artificial recharge
in rain fed areas."
"Other issues on the agriculture
agenda identified in the Approach Paper relate to the need for focused research
in specific crops, farming systems and dry land farming practices, improved
extension work to close the knowledge deficit affecting farm productivity; better
seeds and inputs; enhanced facilities for credit, including revamping the co-operative
credit system; initiatives to support agricultural diversification with effective
marketing solutions; and completing the unfinished agenda of land reforms etc".
The four deficits
Before concluding this
section, I would like to invite your attention to land-mark observations made
by the Prime Minister in his address at 2nd Agriculture Summit on
October 18, 2006, wherein he develops the four deficits theme.
"When we review our agricultural
situation, it is clear that there are four deficits we need to bridge. These
four deficits are (i) the public investment and credit deficit; (ii) the infrastructure
deficit; (iii) the market economy deficit; and (iv) the knowledge deficit. Taken
together they are responsible for the development deficit in the agrarian and
rural economy."
"However, we need more thinking
on the credit front. While the financial system should do more for the credit
needs of farmers, we need to raise some questions. What do farmers need – a
lower rate of interest or reliable access to credit at reasonable rates? Is
our existing institutional framework adequate for meeting the requirements of
our farmers who are a diverse lot? Do we need to create new institutional structures
such as SHGs, micro finance institutions, etc, to provide improved and reliable
access to credit? Or do we need to bring in money lenders under some form of
regulation? It is necessary that we find answers to these questions in the near
future."
New Realities
It is useful to recognise that
there are unprecedented structural changes in the fast-growing domestic economy
and rapidly-integrating global economy. These throw up what may be called new
realities but these have to be met (a) without losing sight of large population
currently dependent on agriculture; and (b) the medium-term trend towards lower
share of GDP generation in agriculture. Thus, while some short-term actions
may be warranted to be sensitive to aspirations and expectations in rural areas,
medium to longer-term strategies have to take into account what may be termed
as new realities, though some of them are old realities with greater relevance
now and in future. There is some recognition of these in the Approach Paper
to 11th Five Year Plan, to which there was detailed reference earlier
in the speech. Kindly let me elaborate on the theme here:
First, there is a continuum of
agricultural and non-agricultural activities, in terms of inputs, outputs, supply
chains, etc, in an emerging, highly-commercialised and globalising agriculture.
Second, there is a spectrum of
financial services such as deposit taking, lending, insurance, pension, mutual
finds, etc, and there exist several financial intermediaries which need to complement
and compete with each other even in rural areas. Banks and banking are a part
of this emerging larger whole of the financial institutions and their activities.
Third, there is a clear trend towards
rural–urban continuum in economic linkages and the process of integration needs
to be facilitated in the interests of growth and equity. Hence, segmentation
of these through public policies or procedures should, at best, be an exception
than the rule.
Fourth, distinction between productive
and non-productive or consumption end, becomes blurred and in any case, consumption
smoothening is essential. The cash flow and risk management become more relevant
relative to ensuring and monitoring end use of funds.
Fifth, today’s technology provides
immense opportunities to the financial intermediaries to reach a large section
of population, assess and price risks better, and minimise transaction costs.
Naturally, this would need considerable business re-engineering.
Finally, there are dramatic changes
in demand for food and other articles and supply of related inputs that need
to constitute some of the basic elements of a new approach. These aspects of
a new approach have been comprehensively and succinctly brought out in a paper
by my colleague Dr. Rakesh Mohan, titled " Agricultural Credit in India:
Status, Issues and Future Agenda. (RBI Bulletin, November 2004). I do not want
to repeat them here.
Issues
The new policy directions by NDC
and the Prime Minister clearly indicate the criticality of improving the credit
system but rightly position it as one of the four deficits that need to be addressed
to manage the crisis of stagnation in the Indian agriculture. Agriculture development
has to be led by ensuring commercial viability, which has to be enabled by an
appropriate credit system. In other words, credit can be a substitute for longer-term
commercial viability only if a price is paid in the financial sector and fiscal
sector. At the same time, costly or inadequate credit system may constrain growth
and commercial viability. The main issues in this regard, therefore, are related
to, what may be called, policies complementary to credit or financial services
for upliftment of rural economy. Illustratively these are:
First, fiscal policy could play
an enabling role in two ways in terms of (a) targetting the poor for subsidy;
and (b) enhancing public investment while encouraging private investment that
would benefit the rural economy. Perhaps to make agriculture commercially viable,
costs and benefits of continuing with the existing allocation of resources for
subsidising water, power and fertilizer need to be assessed vis-à-vis
bestowing focused attention to providing funds for risk mitigation, investments
for enhancing supply, ensuring quality and rationalising availability.
Second, trade policy, both domestic
and external, should facilitate commercialising of agriculture and thus, enhance
the scope for investments. Restrictions to trade within the country at a time
when economy is opening up, may, at times, be less than optimal. As mentioned,
the savings in rural areas and agriculture are now transmitted by the banking
system to urban areas and non-agriculture, often, for want of commercially viable
avenues in rural areas. Besides, banks have to improve their own risk-assessment,
pricing and credit-disbursement procedures on an urgent basis.
Third, major bottleneck is inadequate
arrangements for risk mitigation, be it in regard to quality or timeliness of
inputs especially seed, fertilizer, water, power or price of outputs. The risk
mitigation for natural calamities or vagaries of weather is often discretionary,
based on assessment and response of public-policy. Risk mitigation mechanisms
will make credit disbursal also less risky.
Fourth, there are attitudinal aspects
that need to be considered. It is often said that fiscal support to manufacturing
industry is called incentive, while similar support to agriculture is called
subsidy. It may be worthwhile considering institutional arrangements and incentive
framework that would facilitate attitudinal changes.
Fifth, financial sector as a whole,
and banking system in particular, may have to consider paradigm shift in strategies
and processes consistent with new thinking, as urged by the Prime Minister and
the NDC. Reserve Bank and the whole of banking system stand in readiness to
serve this worthy cause of ensuring development of rural-agrarian economy by
integrating it with the vibrant services and manufacturing sectors.
Let me conclude by thanking the
organisers for giving me the opportunity to share may thoughts on this subject,
which affects a major part of our country’s population. I would also like to
place on record my deep appreciation of the initiatives taken by the organisers
in instituting the Memorial Lecture Series and want to assure them of my whole-hearted
support to this worthy initiative.
Thank you.