The Disenchanted Ones

Once the banks opt out of the scheme they still have to find mechanisms for minimising the impact of any big losses. One suggestion is that the banks should create a reserve, a provision which would act as a cushion in the event of advances going bad. For example: instead of giving a guarantee fee to DICGC the banks might as well set aside 0.5 per cent of total priority sector advances and create a reserve. Public sector banks like the Bank of India and Central Bank are contemplating setting up a 'risk fund' to meet the losses on account of bad debts.

To be able to deliver agricultural credit more effectively, banks are setting up hi tech agricultural branches.These branches would clear investment proposals above Rs 10 lakh. Having such specialised branches is also expected to help in the follow up of loans. The objective is to help improve the recovery rates which varies between 40 and 55 per cent across banks.

But then it has been the regional rural banks that would be most affected by these schemes. The reason is that over 80 per cent of the lending is to the small borrowers, and these banks have NPAs in excess of 50 per cent. In most of the cases the money that they receive from the DICGC is a fraction of the guarantee fees paid by them.

When the nationalised banks provide a loan to the agro industry they usually make the borrower cough up a proportion of the guarantee fees. Some banks however make the borrower bear the entire cost. Thus banks pay the fees from their pocket only in case of the small loans advanced by them, i.e., only on a portion of their portfolio. This avenue is not available to the RRBs.

The other way out--in the interim before debt recovery tribunals become active enough-- is to solicit the support of state governments in loan recovery. But state governments in general have been passive onlookers in this matter, barring a few exceptions like Uttar Pradesh and Kerala. In Uttar Pradesh the system of 'recovery certificates' has actually taken off.

Under this scheme, the banks inform the state administration about the defaulters and the state administrative machinery takes the initiative in realising this amount. In return for its services the state government is given between 5 to 10 per cent of the amount recovered. In Madhya Pradesh, where Central Bank is the lead bank, efforts are on to convince the government to give it a helping hand.

Once this comes about, the need for credit guarantees will automatically diminish.