RBI begins probe into diversion of agriculture loans

Regulator concerned at scale of borrowers using the subsidised money for other purposes; wants to assess extent and how to check this

Concerned over diversion of  agricultural lending to unintended purposes, the Reserve Bank of India  (RBI) has begun a probe on this.

Banks have discussed cases of borrowers using money for purposes other than farming. However, the information is sketchy.  There is need for further systematic assessment, top RBI executive said.

"The central bank has already done preliminary work on flow of loans to agriculture and intends to carry out detailed examination," he said.

According to RBI data, credit to farming and allied areas grew 11 per cent to Rs 7,77,900 crore in the 12 months ended May. The growth rate was higher at 16.8 per cent in the previous 12 months, with credit  of Rs 7,01,100 crore in May 2014 and Rs 6,66,600 crore in May 2013.

Public sector bank (PSBs) executives said the high overall subsidy, repayment to money lenders and weak monitoring of credit usage at the ground level seem to contribute to such diversion. Gold loans, categorised under farm loans, are a grey area.

Crop loans get central government subsidy (interest subvention) of two per cent and over. Above it, some state governments provide up to four per cent. The interest subsidy is intended to reduce financial burden on the farmer. In many instances, the borrower apparently puts that money in fixed deposits.

"It is win-win situation for borrower and branch. The borrower gets cheap money, parked for interest income; the branch gets to book a loan and raise liabilities. This is a business done without serving the purpose and at a cost to exchequer — public money from the budget of governments," said a senior official  with the National Bank for Agriculture and Rural Development (Nabard).

A top executive of a PSB said there are also instances where loans have been given to buy tractors for farm activity but it gets used for construction or in renting for transportation.

A senior manager with State Bank of India said many a time, farm loans (from banks) are inadequate to meet requirements. and farmers are forced to avail of loans from informal source (money lenders) at very high rates and on stiff terms. When it comes to repayments, money lenders apply pressure to clear their dues first. The farmer often uses part of the money from a bank loan for this, the executive said.

Agricultural lending is essentially being done through branches in rural areas. With a large number of customers spread over a vast expanse, the branch staff is pressed for time to do a detailed scrutiny, PSB executives note.

All commercial banks are now on a Core Banking System platform which captures information on transactions. An analytic software could be used for tracking the nature of disbursements of farm loans. This could throw up clues on usage, said a Nabard executive.

Bank executives said loans extended against gold and gold jewellery by banks are categorised as farm credit and form about 30 per cent of agriculture and allied sector credit. An RBI executive said gold loans are prominent in the southern states. As a  thumb rule, half of gold loans are presumed to be used for consumption need.