Sunday, April 27, 2008

The cacophony :

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 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 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 that these volunteers could serve as krishak mitras 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 krishak mitras 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!!.


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Works at NABARD for poor HH / was Research Affiliate at CDS, Tvm / was Visiting Faculty on microFinance for MBA students NMIMS, Mumbai.