V Kumaraswamy: Agriculture credit: let banks lend at 36%!

For years now our policy planners have been getting it wrong on the agriculture credit front.

It looks like the report of the expert committee of V S Vyas on agricultural lending, submitted a few months ago, exhorts the system to huff and puff along the same beaten track.

And the Good Samaritan initiatives and pronouncements of the United Progressive Alliance's Common Minimum Programme and the recent Budget are likely to bring more trouble than salvation.

Elementary economics tells us that market interventions work best when we try to control either price or the quantity. Attempting both is a sure recipe for failure. This is precisely what our credit experts have been attempting to do all along. You can't prescribe the objective (adequate credit at cheap rates) as the strategy and hope it will succeed.

The interest rates mandated have just not interested the banks, which is why the achievements vis-à-vis the targets for such lending makes pitiful reading. This has been going on for years. Given that deterrent individual punishments or cancellation of licences are not the Reserve Bank of India's methods of coercion, we need a fundamentally different approach.

If the supply of credit to the rural sector can be increased "" and our banks have the muscle to do so, provided the price is appropriate "" and competition created for the moneylenders' monopoly (each of them is a monopolist in his village), interest rates will come down.

The only way "" perverse though it may seem "" is to let the banks lend at 28 and 36 per cent, even if it is usurious. This will provide banks with adequate compensation for the high unit transaction costs given the geographical dispersion that such lending entails.

When the intended beneficiaries are currently paying 36, 50 and 3,650 per cent (if you consider the kind of schemes that involve returning Rs 11 in the evening for Rs 10 lent in the morning), 28 and 36 per cent are hardly radical. At least, there would be an alternative channel to the moneylender whose recovery practices are dreadful and the only bankruptcy laws that the farmer is aware of is suicide.

Once the supply side expands, the borrower beneficiaries get comfortable and the banks achieve critical mass, the rates will drop by themselves. At the very least, after two or three cycles, we will have a "working system" within the organised banking fold.

The other error is trying to change or reshape the market to suit our notions of what is good credit rather than accept the rural credit market as it is with all its idiosyncrasies steeped in social traditions and seemingly unviable practices in the eyes of copybook credit analysts.

When farmers go to the extent of taking their lives to protect their izzat, credit default can't be much of an issue. Social shame in a closed village or small town circuit works as a far better deterrent than the combined potency of all our bankruptcy laws, debt recovery tribunals, corporate debt restructuring panels and so on.

We have to get rid of our notions of what is "bankable". The farmers' consumption needs as much as those related to his agriculture or other ventures dictate the credit requirements.

It is a composite credit where there is not much distinction between the entrepreneur's consumption and his enterprise's expenses. The strength of the village moneylender is that he is willing to finance marriage expenses, funeral expenses, small ticket loans for medical emergencies, cattle purchase, house repair, and so on. He can lend Rs 20 or Rs 20,000 at 8 p m or 6 a m.

All it takes is perhaps a couple of hours. No elaborate documentation, policy guidelines and head office approvals for him. He only has to be satisfied that the money will come back or can be made to come back. Personal knowledge of the borrower or his "surety" is good enough reason for him to lend.

Our banks can fret about lending for non-production purposes, security not being tight, and that the loans aren't self-liquidating (instead, it often leads to liquidation of the self). But that's what the market is. Changing it is a social effort that might take generations.

The government is either concerned with farmers' welfare or is not. If it is, it is better and quicker for the banks to change their ways to suit the prevalent market rather than waste effort reshaping it.

The banks and the Reserve Bank would need to reshape their existing notions of what constitutes security, surety, purpose, default and appropriate rates of interest. These need to be tuned to the market we are trying to serve rather than the distant Basel norms.

Perhaps the concept of non performing assets (NPAs) for agri-loans would need to be scrapped altogether in favour of a small loans guarantee or insurance to our banks.

The aim must be to get a firm foothold in the market and provide competition to the moneylenders' stranglehold rather than trying to change a market in which you are not even seen as serious player.

To illustrate, the Reserve Bank has debarred self-help groups from taking deposits even before they have made their market presence felt, when taking deposits would have made the rural folk develop a strong stake in them.

Things like patchwork tampering of the definition of NPAs as is being attempted now and not insisting on "security" (as bankers understand it currently) for less than Rs 10,000 may not bring about earthshaking changes.

We can keep appointing expert agri-credit committees take 1, take 2...take 56, spanning generations. But there won't be much difference in the findings and recommendations between take 3 and take 56, unless we realise that we can't dictate the market nor can we control both the price of credit and its amount at the same time. Till then all the regulatory fiats will be like King Canute's orders.

There are serious attempts to pump in more credit from the National Bank for Agriculture and Rural Development (Nabard) and other institutions for the purchase of farm implements and tractors. There can be no dispute about our farm productivity (per man or per acre) being low. But trying to solve it through mechanisation will be pointless.

As a beneficial side-effect, low productivity has been instrumental in keeping a disproportionate number of labour at least partially employed.

Cheaper credit for mechanising their work will only result in releasing them, at a time when the manufacturing sector is not exactly poised to absorb them and the other avenues of employing them within agriculture "" such as diversification into newer commercial crops and extending agriculture over extended areas and wasteland "" do not have sufficient momentum yet.

The world is not exactly crying for increased output from India's productivity improvements. Already, there is a glut in most products that it takes a vast amount of subsidy the world over to keep it going.

Increased yields might unwittingly drive market prices lower and the government's subsidy bill on support prices will only balloon when the markets' absorptive capacity is at saturation levels.

If high interest rates and unavailability is keeping mechanisation at a low level, considering the woeful social consequences of disguised employment becoming year-round unemployment "" so be it!

(The author works as treasurer of a large chemical company. The views expressed here are personal)