Tamal Bandyopadhyay: From lazy to crazy banking

The government should not put the onus of reviving rural India on banks alone

The blue-print is ready for the government-owned banking industry's new-found passion, agriculture lending. The action plan "" prepared jointly by the National Bank for Agriculture and Rural Development (Nabard) and the national bankers' body, Indian Banks' Association (IBA), under the directive of the new government "" envisages a 30 per cent surge in farm credit in FY2004-05.

That is, from Rs 80,000 crore to Rs 1,04,500 crore. Of this, 27 public sector banks will lend Rs 57,000 crore, the regional rural banks Rs 18,500 crore, and the cooperative banks Rs 39,000 crore.

There is also a plan that each of the rural and semi-urban branches of the public sector banking industry will bring in 100 new farmers under its fold during the year. With 33,000 such bank branches spread across the country, the commercial banking industry will embrace over three million new farmers as its customers by March next year.

What's more, for farmers in distress, there will be a loan restructuring package that will club the outstanding interest with the principal amount as it stood on March 31 this year. They will be given five years to repay the loan with an initial moratorium of two years.

Prima facie, there is nothing wrong in offering this concession to agricultural borrowers. If the banks can restructure the loans given to corporations, bring down the interest rates and also offer them a longer repayment period, surely it can follow the same method for farmers? After all, the farmers' produce suffer from natural calamities over which they have no control, just like corporations are affected by cyclical downturns.

Moreover, instances of fund diversion by farmers are far less than what one sees in the corporate sector. There are occasions, rare though, when a small and marginal farmer ends up diverting funds worth a few thousand rupees (meant for buying implements and fertiliser) to meet the dowry demand of his prospective son-in-law or the medical expenses of his ill wife, while some companies regularly siphon off large chunks of funds to buy a villa for the promoter at Veve in Switzerland or a Mercedes for the managing director.

In a way, public sector banks are being forced to do penance for their decade-long neglect of the farm sector. When corporations shied away from the banking system and started raising cheap money from the markets, bankers found an easy way out to build assets "" buying zero-risk government paper and chasing the urban middle-class for home, car and sundry personal loans.

The result? Their exposure to government bonds is now over 40 per cent of their total assets against the Reserve Bank of India-stipulated floor of 25 per cent, but the share of agricultural loans in their portfolio is much below the required 18 per cent. This is nothing but lazy banking and this approach to doing business needs to change.

However, credit flow to the agriculture sector alone cannot change the fate of Indian farmers. After all, bank finance is only one of the many inputs required to prop-up the farm sector. If the finance ministry thinks that the onus of improving the lot of farmers lies only with the public sector banks, these lazy bankers will turn into crazy bankers overnight.

Consider these facts: India is the second-largest producer of rice and wheat in the world, first in the production of pulses and fourth in coarse grains. It is the largest producer of coconut, cashew nut, ginger, turmeric and black pepper, and the second-largest producer of groundnut and fruits and vegetables.

It accounts for about 10 per cent of the world fruit production and ranks first in the production of mango, banana and lime. Milk production in the country, estimated at 84.6 million tonnes, is the highest in the world.

India is also the fifth-largest producer of eggs and seventh-largest producer of meat. Despite this, the contribution of agriculture to the country's gross domestic product (GDP) is coming down gradually.

This is not because of lack of farm financing alone. There are a host of other issues that need to be addressed by the government on a war footing. The market for agriculture produce continues to be subject to heavy procurement interventions.

The concept of minimum support price (MSP) system has changed the cropping pattern in favour of rice and wheat at the cost of the other components of the consumption basket "" cereals, oilseeds and pulses, fruits, vegetables and poultry.

Even in years of bumper production, the MSP mechanism helps maintain the prices of rice and wheat at a high level, making the cultivation of these two crops more remunerative than pulses and coarse cereals.

The MSPs for rice and wheat are always higher than the market prices and the cost of cultivation, whereas in case of oilseeds and pulses, they barely cover the cost of cultivation and are always lower than the market prices. So, there is no incentive for cultivation of these crops.

Gross domestic capital formation in agriculture has been on a secular decline, triggered by the steady erosion in public investment. Private sector capital formation is concentrated in those areas where water, power and other inputs are available in plenty and, to top it all, there is huge subsidy offered by the government.

In the absence of proper infrastructure, rural India cannot shine. The irrigation coverage is not adequate and electrification has a long way to go. Poor rural road connectivity and insufficient rural markets are other major infrastructure bottlenecks.

Under the Agricultural Produce Marketing Regulation Act, only the state governments can set up markets for agricultural products within a defined area. So, private participation in developing alternative marketing infrastructure can open up only after the relevant state Acts are amended.

The established system of procurement of food stock at an assured price, creation of buffer stocks and public distribution locks up large resources. The Expenditure Reforms Commission had recommended phasing out of all input subsidies and capped the buffer stock at 10 million tonnes "" four million tonnes of wheat and six million tonnes of rice.

However, the average food stock stacked by the Food Corporation of India has been around 35 million tonnes over the past few years. The cost of maintaining a high level of food stocks has its impact on the fiscal situation as well as the banking system.

In fact, an Administrative Staff College of India (ASCI) study on the monetary and fiscal implications of excess stocks has suggested that the marketability of the stock depends on the quality of foodgrains and the age of the stock. In case the stock is old and needs to written off, the banking system runs an enormous credit risk.

Traditionally, the concern for rural India and the activation of the government mechanism come to the fore only in the aftermath of a drought. The pattern is quite predictable: first, a taskforce on drought is set up to oversee the relief measures.

Then, additional quantities of foodgrains are allocated to various states as part of the food-for-work programme, besides ensuring supplies of fodder for cattle. At the next stage, measures are initiated to provide employment and purchasing power for the drought-affected people.

Finally comes the waiver of interest on banks loans and rescheduling of crop loans, laced with a liberal grant of input subsidy to small and marginal farmers.

Over the decades, banks have been used and abused as a sort of lender of the last resort to rescue farmers. The government must change this approach. It needs to take a relook at rural India and address all relevant issues "" including high premium on crop insurance "" in a coherent matter. The banks alone cannot save the farmers.