The CACOPHONY !!!!!! RBI Report on Agri lending : My Comments
It was another day and it was another report ....the endless time ..we have seen reports being presented on the same subject ...Agri Credit !!...cacophonic to say the least ...is anybody interested is what is being said. This Report from RBI was a draft seeking comments from Public ...for what ever it was worth ..i keyed in a few of my favorite ...sometimes rhetorical comments, perhaps it was needed ...the Indian agrarian crisis is on ....may be someone good and sensible /action oriented chap will have a peep and do something about it. I am presently helpless ..other than scribbling a few things back..i can do no more ...this was what i wrote back to RBI in 2007. Allow me to start with a sensible saying which has often intrigued me.
“In crises, the most daring course is often the safest” - Henry A. KissingerYES; we are also in the midst of a crisis … the agrarian crisis, despite all the talk of 9 + growth of the economy. Amongst its recommendation the committee has aptly touched on changing attitudes of the rural banker, thru appropriate staffing in rural areas, aptitude shaping and competency inputs, incentivising rural postings, including pecuniary ones…. We have talked about this in the past; this of course is the daring course. The committee could have also considered a channel “Rural Development Banking service” in commercial banks linked with incentives. I believe there are a few mundane, but competent and committed rural bankers, who are NOT keen to get back to cities and urban branches.. which anyway is already overstaffed. Commercial Banks can in the process rectify the skewed staff deployment of staff.
2. The Indian (small) farmer seems to be clouded in a catch-22 situation, not merely about access to credit or the cost of credit. But often on a host of other related and unrelated issues, like inputs costs which have multiplied with GM seeds , high cost of fertilizers and pesticides, he is also faced with a quandary of which crop to take, what monsoon is forecasted for him, what markets etc etc . His land is being snatched away by SEZ developers, his son who aspires not to be farmer but his education has become costlier with privatisation of education, medicines are not affordable and above all he is also enticed by social commitments and lured by new gadgets and spate of consumerism which has engulfed the rural hinterlands. These enticements often scoot off his tiny surpluses. The National Commission of Farmers has also started their final report to GoI, stating that” the Indian farmer is in deep distress”. Presently, credit subventions, are being implemented as a solution to this …but, certainly it is not a long –term solution !! One probable option is to change the bankers attitude of financing the entire agri-supply chain, presently the financing is so production focused….crop loan and crop loans or a few cases term loans with the intent of supporting crop production. The credit needs of pre/post production activities needs attention ..it is often ignored. There are credit needs for harvesting, grading, sorting , transport, storage ( pledge finance is done in a very limited way), processing, agri-logistics support or any market related activities etc etc needs due attention. Thus, financing the entire agri-supply chain should be part of direct agriculture and priority sector finance.
3. Presently, the bankers promote or form farmers club mainly because of pressure from development institutions like NABARD… ,though it has been vogue for over 25 years. The bankers’ interest is muted when NABARD support is stopped or reduced. They are still to realise the usefulness and utility of such interventions -farmer clubs -as agents for spreading the development concept or instil the culture of repayment. Infact, these clubs were the first units for credit counselling and financial education in rural banking sector in India, commenced 25 years back. If something needs to be done for helping the hapless and amiable agrarian community… activating or forming one farmer club per branch should be made mandatory ..so that these volunteers could serve as krishakmitras for counselling and financial education. It is also important the senior officials / top management in banks also realise and do full justice to rural credit and forming active farmers clubs and not merely survive on just lip service and verbal discourses. Even if one active farmer club is in place in a branch..with 10-15 krishakmitras we would have done yeomen service to this neglected community.
4. Any credit product for low income groups needs to be a versatile credit line leaving a great degree of suppleness and flexibility at the hands of the credit user. Designing too many credit products serves no purpose. One could learn from the example of BRI, Indonesia, which has one credit product termed KUPEDES to cover all purposes. This,‘ general loan’ is the only loan product offered by the Unit Banking System of BRI. This product is designed specifically for the lower income borrowers with simple loan procedure, quick processing and flexible terms. In fact, BRI's unit system acquired its worldwide reputation only because of this versatile loan product wherein all types of requirements of rural population whether investment or production or even consumption purpose is taken care of in the simplest possible and cost effective manner. It is important to remember that poor view money as a fungible resource and designing a product of this kind would enable them to access credit more easily, without the hassles of specifying purposes, quotations etc. The word poor should not be misread for BPL alone , infact all loans upto Rs 50,0000 for rural poor should be read as a loan for poor…...
5. Credit delivery systems like SHGs / JLGs are aimed at reducing costs viz; risk and transaction costs will have to be process driven and NOT target driven. The later approach is so forcibly employed in all times by policy planners and government, often leading to erosion in quality of credit and the blame squarely falls on the delivery methodology rather than on the perpetours of accelerated target setting.
6. The suggestion of doing away with No Dues Certificate would be beneficial to the customer and would save time and resources for those intending to access credit. However, this I believe is again a short term solution. The unwilling banker would resort to other means to deny credit. If the issue of information asymmetry in rural credit is to be tackled , it would come only through establishment of “ Rural Credit information bureau”; perhaps in each district. This could be established by agencies like NABARD- as a commercial venture. Once a credit clearance is given by a credit bureau , then credit will have to be dispensed. Presently, CIBIL does these functions for large loans .. however, the reporting systems are negative (ON NPA accounts).
Besides, the above observations, there are a few suggestions by the Committee which are repetitive and old fashioned. I need to add digging our head into history is a sign of weakness!!.
------------ State of the present Indian Economy – A snapshot
Introduction Vigorous growth of Indian Economy with strong economic fundamentals like 9.4 % GDP growth was observed during the 2006-07. High growth in the manufacturing sector like automobile, steel and the services sector, like banking & IT has been the hallmark of the economic boom. As the overall macroeconomic fundamentals have been robust with the reforms process in place, Indian has been attracting a lot of foreign direct investments, with many foreign companies investing in India. There are many examples of large multinational like IBM, Microsoft, LG, Samsung setting up offices and making large investments in our country, which has also resulted in greater employment and overall development of the country. However, on the flip side there are many weaknesses too, which needs to be addressed by the government. The following paragraphs give a brief outline of the same.
Take a look at the National Picture :
India is one of the fastest growing major economy in the world, with a GDP growth rate of 9.4% for the fiscal year 2006–2007 and is only next to China. India has a large foreign exchange reserves of over US$ 222 billion, A booming capital market- were investor put money Foreign Direct Investment of US$ 15.5 billion in the current year . More than 20 per cent growth in exports to foreign countries. Some of the reasons for the GDP growth for 2006-07 have been manufacturing sector, which grew by 12.3 per cent and the services sector like trade, hotels, transport and communications sector, which grew by 13 per cent during the previous year. The Indian economy has seen a large transformation from its position just after independence when compared to today. If one looks at the sectoral contribution to the Indian in two different stages , we find the following broad changes: the table below shows the broad share of GDP Sector ---------- 1951 -------------2007 1. Primary sector – 54 % ----------18 % 2 Secondary ---- 25 % -----------27 % 3. Tertiary sector –21 %----------56 % This clearly shows that the services sector and the manufacturing sector boom have largely contributed to the development of the Indian economy.
India followed a socialist-inspired approach for most of its independent history, with strict government control over private sector participation, foreign trade, and foreign direct investment. However, since the early 1990s, India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. The privatisation of publicly owned industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid political debate. These reforms has laed to the accelerated growth of the Indian economy.
Agriculture Agriculture in India is one of the most prominent sectors in its economy. Agriculture and allied sectors like forestry, logging and fishing accounted for 18.6% of the GDP in 2005 and employed 60% of the country's population. It accounts for 8.56 % of India’s exports. About 43 % of India's geographical area is used for agricultural activity. Despite a steady decline of its share in the GDP, agriculture is still the largest economic sector and plays a significant role in the overall socio-economic development of India. The monsoons play a critical role in the Indian sub-continent's agriculture in determining whether the harvest will be bountiful, average, or poor in any given year. The entire rainfall in the sub-continent is concentrated in the few monsoon months.
Industry : India is fourteenth in the world in factory output. They together account for 27.6% of the GDP and employ 17% of the total workforce. Economic reforms brought foreign competition, led to privatisation of certain public sector industries, opened up sectors hitherto reserved for the public sector and led to an expansion in the production of fast-moving consumer goods. Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family firms and required political connections to prosper was faced with foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, focusing on designing new products and relying on low labour costs and technology.
Services : India is fifteenth in services output. It provides employment to 23% of work force, and it is growing fast, growth rate 7.5% in 1991–2000 up from 4.5% in 1951–80. It has the largest share in the GDP, accounting for 56 % in 2005 up from 20 % in 1950. Business services (information technology, information technology enabled services, business process outsourcing) are among the fastest growing sectors contributing to one third of the total output of services in 2000. The growth in the IT sector is attributed to increased specialisation, availability of a large pool of low cost, but highly skilled, educated and fluent English-speaking workers (a legacy of British Colonialism) on the supply side and on the demand side, increased demand from foreign consumers interested in India's service exports or those looking to outsource their operations. India's IT industry, despite contributing significantly to its balance of payments, accounted for only about 1% of the total GDP or 1/50th of the total services
Constraining factors Notwithstanding a rosy picture of the Indian economy now and in the years to come painted by the government , there are a number perturbing aspects, glossed over by the media.
Poverty : Poverty is fairly uneven, with the top 10% of income groups earning 33% of the income. While poverty in India has reduced significantly, 17.59% (over 230 million) of Indians still live below the national poverty line. A 2007 report by the state-run National Commission for Enterprises in the Unorganised Sector (NCEUS) found that 77% of Indians, or 836 million people, lived on less than 20 rupees per day (USD 0.50), with most working in "informal labour sector with no job or social security, living in abject poverty." In August 2005, the Indian parliament passed the Rural Employment Guarantee Bill, the largest programme of this type in terms of cost and coverage, which promises 100 days of minimum wage employment to every rural household in 200 of India's 600 districts. The question of whether economic reforms have reduced poverty or not has fuelled debates without generating any clear cut answers and has also put political pressure on further economic reforms, especially those involving the downsizing of labour and cutting agricultural subsidies. Other socio-economic impediments 1. Corruption : Has been one of the pervasive problems (present everywhere)affecting India. It takes the form of bribes, evasion of tax and exchange controls, embezzlement, etc. The economic reforms of 1991 reduced the red tape, bureaucracy and the Licence Raj that had strangled private enterprise and was blamed for the corruption and inefficiencies. Yet, a 2005 study by Transparency International (TI) India found that more than half of those surveyed had firsthand experience of paying bribe or peddling influence to get a job done in a public office. Infact , practical experience suggests that more the growth , greater is the level of corruption. Corruption is higher levels have tended to far exceed the numbers , unlike the low level corruptions , which seems to ease as excessive governmental controls has been removed .
2. Unemployment : Agricultural and allied sectors accounted for about 57% of the total workforce. While agriculture has faced stagnation in growth, services have seen a steady growth. Of the total workforce, 8% is in the organised sector, two-thirds of which are in the public sector. The NSSO survey estimated that in 1999–2000, 106 million, nearly 10% of the population were unemployed and the overall unemployment rate was 7.32%, with rural areas doing marginally better (7.21%) than urban areas (7.65%). Unemployment in India is characterised by chronic underemployment or disguised unemployment. Government schemes that target eradication of both poverty and unemployment, (Which in recent decades has sent millions of poor and unskilled people into urban areas in search of livelihoods.) attempt to solve the problem, by providing financial assistance for setting up businesses, skill honing, setting up public sector enterprises, reservations in governments, etc. The decreased role of the public sector after liberalisation has further underlined the need for focusing on better education and has also put political pressure on further reforms
3. Regional imbalance One of the critical problems facing India's economy is the sharp and growing regional variations among India's different states and territories in terms of per capita income, poverty, availability of infrastructure and socio-economic development. There very rich states and regions like Punjab, haryana etc and very poor states like Bihar, Jharkhand , orissa (the so-called BIMARU states (viz. Bihar Madhya Pradesh, Rajasthan and Uttar Pradesh)has lead to regional disparities and lessening of economic inequalities fared particularly badly.?
The five-year plans have attempted to reduce regional disparities by encouraging industrial development in the interior regions, but industries still tend to concentrate around urban areas and port cities.
Similarly there is also the Urban- Rural divide- almost 72 per cent of households live in rural areas and account for 75 per cent of the population of the country. In other words, only 25 per cent people live in urban areas. The urban-rural gap has been increasing because most of the attention of the government and of the media is concentrated largely on the cities and towns
4 Poor infrastructure / health and education
India has a very weak infrastructure , roads , poor supply of electricity and transport mechanism , which has also adversely affected the performance of the industry.
5 Human development, poverty and inclusiveness
The real goal of inclusive growth can be achieved only through effective government intervention in the areas of education, health and support to the needy. However, access to financial services itself a great challenge, despite all the measures taken by the Government, the BoP clients are still excluded. The level of financial exclusion ranges between 20-40 % , even after 4 decades of social and priority sector banking efforts by the Government.
Where do stand as far as other indicators are concerned…., let us look at what the global Human Development Report (HDR) of the United Nations . According to it, from the point of view of human development index (HDI) India is ranked 124 among 177 countries. This has not shown any improvement despite all the growth that is recorded. So far as the health sector is concerned, a comparison with neighbouring countries reveals the shameful state of affairs in India. Life expectancy( how long an average person lives) at birth in India is 63 years as against 71 years in China and 74 years in Sri Lanka. In other words, an average Chinese or Sri Lankan hopes to live much longer than an average Indian. Similarly, in the matter of infant mortality rate( new born kids dying) India is far behind these two neighbours. The mortality rate per 1,000 live births is 87 in India as against 37 in China, 15 in Sri Lanka, 69 in Bangladesh.
The word racism did not make much sense to me except that many of my known friends preferred choosing a very fair colored spouse. Everything changed when my little daughter came back from school to tell me … dad the teacher always talks, admires and answers questions raised by girls who are very fair…. She even gives them extra marks and abuses us when we go..why is that…..do I look ugly” . This distressed me a lot though I tried to console her.
This is something which happened about 10 yrs back, now I feel every segment of the Indian society smacks of racism..office, schools , college etc etc and we (Indians) have no moral right to preach to South Africans and others. I fear, we are great ethical preachers and not serious about change.
BRI experiences -- Sustaining the sustainer!! or Do all broken eggs make an Omlette ?
Traditionally, micro banking by Rural Financial Institutions world over is beset with chronic problems like financial non-viability, inefficiency and poor recoveries. In marked contrast to this general situation, Bank Rakyat Indonesia’s (BRI) micro lending stood out as a beckon of hope during the economic crisis that lashed Indonesia in late 1990’s. During the period of crisis it was a case of micro taking care of macro- a case of Reverse-subsidization- Micro banking supporting retail, commercial & investment banking units of BRI. BRI and its Unit Desa has been a storehouse for researchers and practitioners of microFinance. Many experts have considered the Rural Financial Institutions in Indonesia and more particularly BRI as "the world's laboratory of rural financial market experiments". There is hardly a forum on micro-credit that does not get a mention of BRI and its Unit Desa (or Unit system that it is called now). The much talked about microFinance delivery model is a world beater not only for its achievements in micro banking but also when it comes to number of times its achievements are repeated in power point presentations by mF enthusiasts … sometimes a bit cacophonic!!
Retail Micro banking requires an altogether different lending and management culture as compared to commercial banking. The clientele is distinct and their needs are different. Their requirements are meager and loan size is small. What attracted many to BRI was the institutions clear-cut mission, its simplicity of approaches, its explicit delegation of powers for the Units & branches. Staff requirements in BRI were assessed based on certain easily identifiable and instantly recognizable benchmarks (like Credit-man: 400 customers, Teller: 200 daily cash transactions, Bookkeeper: 150 average daily book transactions). Each unit was honed to serve as independent profit centres – "perform or perish strategy". Each stand-alone profit centres had their own separate Balance Sheet & P & L Account, with very simplistic transfer price mechanisms. Added to this was the performance linked incentive system for the staff that spurred a work culture and perhaps harnessed the best out of the staff. The bank also invested heavily in iterative training and capacity building processes for its staff. The corporate policy itself states that 5% of the staff cost will be used as training budget and for HR building, exhibiting the corporate commitment and purpose. Further to this was the only naive loan product- KUPEDES an all-purpose flexible credit scheme, usually given for productive activities and that too only to the family with spouse as a co-signatory. The loans were collateralized (150% of loan amount), with prompt payment incentives and life (loan cover) Insurance for all borrowers. The recovery rates were high basically because the loan products were designed with short maturities and regular payment schedules, financial incentives were built into the loan product for prompt servicing of loans and above all an implicit promise of higher repeat loans also sustained high repayment rates. These progressive lending practices were depended on record of borrower classification:
Rating Criteria Subsequent loan ceiling A All payments on time Increase of 100% B Final payment on time, one or two late payments Increase of 50% C Final payment on time, 2 or more late instalments Same amount D Final payment late, but within 1 month of due date Reduction by 50% E Final payment more than two months late No new loan
Another key factor in the success of BRI has been its focus on deposit mobilization through sustained Strategic potential mapping and marketing exercises that focused on savers with reasonable surpluses. 87% of the BRI Units funds originate from about 25 million small savers. These resources are normally are not prone to wide fluctuations as rural savings are found to be more stable. Besides this is an incentive system for savers with the bank through periodic lottery and lucky dips ensured greater customer loyalty.
Heaped in all this great features are the not so visible aspects of micro banking which may perhaps need the attention of the bank? A closer look at the loan portfolio reveals that with the excessive emphasis on short-term loans, the investment credit needs of the rural clients have been given a go by. It needs no emphasis to mention that capital formation in rural areas would come through sustained investment in capital assets. Majority of the loans offered through the over simplified loan product; KUPEDES has resulted in supporting predominantly trading activities, with little or negligible asset creation. This perhaps has also resulted in skewed loan portfolio of the BRI units-, which are, not only short -term but also tilted heavily to a particular credit segment- a likely portfolio risk!!! It is not idealistic to think that a holistic development of villages as economic units would come through a balanced approach to farm and non-farm activities as well as an appropriate mix of short term and long- term credit needs. This is perhaps possible and needs to be addressed by institutions that purvey credit to those critical segments of the village community. Of course there could be loans for projects with long gestation period as well, a formal institution like BRI have to address this need / requirements. Sometimes a thrust on activity based loaning provides the enabling conditions for diversification of investments even at the borrower level.
Another moot point is - Is the bank really catering for the poor? - The stand taken by the bank to provide credit to existing production or trading units, what happens to the segments of the population that are unbanked? Do they continue to be served by the informal sector? Does the bank believe they are not bankable? Could it not come out with product lines to serve this niche segment with suitable collateral substitutes? If a government owned banking system well placed in rural areas does not address this need, then which formal institution would address this need or bridge this gap?
The spread available to BRI is too huge that one cannot even dream of. One wonders whether managing this high spreads is sustainable. Another concern is the high cost of financial intermediation in BRI units. It is estimated to be around 10-15 %, which works out to about 5 times the cost of intermediation by a Regional Rural Bank in this country. Are we in the guise of market related interest rates, transferring the high cost of financial service delivery to the poor? Who keeps a check on the inefficiency in credit delivery? Do the existing clients have any alternate arrangement or options to fall back on?
Another moot issue is the incongruity in assets and liabilities of the BRI unit system. Looking at its predominantly short term loan portfolios and resources being mobilized predominantly as term deposits - could there be mismatches in the assets and liabilities? Would it be advisable to contract long-term deposits at high costs in a falling interest rate regime? Would this in the longer term prove detrimental to the interest of the bank? A moot point!!
BRI has made a conscious decision to invest considerable time and resources in the development of the unit savings instruments and products. This has resulted in the units being able to mobilize substantial deposit resources. Surprisingly issue of cheques has been confined only to current account holders. This has led to high amount of cash transactions and cash handling in BRI units. Could this be a reason for the high cost of transactions? Does this make the system become more prone to risk of leakages?
As a holistic micro banking unit spread across the 3000 + villages of the country, the banking system has little or minimum efforts at increasing its fee based income. The non-interest incomes are very low BRI Unit System, which perhaps need a closer look and careful study. The BRI should attempt to address and serve the needs of rural communities who like any other client would need a host of other financials services which could range from safe deposit lockers, remittances, guarantees, mutual funds etc etc
It is important to add that there are many points to learn from the BRI's experiences and very few to quibble about. These issues have been raised to serve as points for debate, which perhaps would help microFinance enthusiasts, look at institutions and credit delivery mechanisms more holistically and pragmatically.
My parents named me B.S.Suran. B stands for Bahulayan Kunjupillai- my dad's name and S for my mom's name Swarnalatha. The naming itself was very unique ...very against the normal conventions of keeping a caste or family name. Perhaps, it was the first case where i have a come across a combination of parental names. Suran - the given name has it origins from the Sanskrit which means GOD. It was perhaps the opposite of ASURA ( demon) , which people are more conversant with in this great era. I have now roamed the earth for half a century. I have a whole lot of experience in varied things , which people normally don't ask for.
I took a PhD in agriculture and then subsequently passed the Certified Associate of the Indian Institute of bankers (1). Had a unique experience of being trained at the Centre for Rural Development and Training, University of Wolverhampton, U.K on subjects covering Organizational Development, Research Methods and Consultancy. I have now more than two decades of experience in the Apex Development financial institution -National Bank for Agriculture and Rural Development (NABARD) with copious and rich experiences on various facets of rural credit, organisational development and rural projects. My current responsibilities include institutional development of co-operative institutions and rural banking institutions, assessing competency and capacity building needs of different stakeholders, facilitating institutional development plans, including turn-around strategies. Having served as a Faculty at a training establishment for 8 years, i do have experience in mapping capacity gaps and training needs and actual conduct of Organisational development interventions. My interfaces and experiences with microFinance since 1998 has been the most thrilling part of my career. Having served about 6 years in the micro Credit Innovations Department of NABARD , i do possess some knowledge and experience in microFinance, including designing microFinance products and financial services delivery systems. Have assisted and facilitated negotiations with international development agencies like the World Bank, IFAD, GTZ, KfW, maintained liaison with GTZ and KfW for two projects on mF that were supported by these multilateral agencies. I have provided two international consultancy assignments for GTZ, Germany and also a Commercial agriculture project for ADB, Manila. Having worked in APRACA Secretariat, i do possesses strong strategizing and networking capabilities.
I am presently on a sabbatical doing research in microFinance at the Centre for Development Studies, Trivandrum, Kerala