A Need To Re-Structure

After the Green Revolution set in, the government of India, in 1969, laid down a deliberate "multi -agency approach" with regard to formal credit institutions, instead of depending only on two wings of the co-operative structure as earlier. This was, on one hand, to keep pace with the huge financial resources required for developing Indian agriculture (which has become capital-intensive) at the expected growth rate after the advent of the Green Revolution, and on the other, to minimise the incidence of rural poverty and generation of employment opportunities on the other. With the adoption of the "multi-agency approach" India now has a whole host of credit institutions to meet the credit requirements of rural households living in 550,000 villages:

 

n87 commercial banks with 32948 rural/semi-urban branches;

n196 regional rural banks with 14536 branches;

n28 state co-operative banks with 651 branches, 361 district central co-operative banks with 10775 branches, 90783 primary agricultural credit societies;

20 land development banks with 1000 branches, 747 primary land development banks with 1153 branches.

While these banks have been experiencing pernicious problems leading to their ineffectiveness in the delivery system, the government of India and Reserve Bank have advised private companies, trusts or societies to set up banks, one for three contiguous districts on the pattern of regional rural banks (RRBs). If past experience is any guide, mere addition of credit institutions is not going to solve the problem of the rural credit delivery system in India and achieve the expected results. It is against this background that an attempt is made in brief here to suggest policy measures that needed to be initiated by the government for improving the health of the existing institutions and making them efficient and responsive to rural needs, rather than wasting scarce and costly financial resources in setting up more institutions.

Existing inadequacies

With the introduction of the Service Area Approach, a good number of rural branches have to focus on very limited areas which cannot generate adequate business to make their operations viable. Thus, there is need for expanding the area of operation for these branches through merger of adjoining branches. Besides, there is also a need for a detailed analytical study on the operational viability of loss making branches and a policy decision should be taken to close down these branches. If this is done, the rural population shall be provided banking facilities by the adjoining branches.

It is also necessary to inculcate the spirit of competition among different commercial banks operating in the block. The branches must be allowed to extend credit anywhere within the block rather than confining themselves to their respective areas. It has also been observed that some banks under the plea of a credit squeeze or resource crunch are not financing needy rural house-holds, which cannot even approach other willing banks without obtaining a No Objection Certificate.

During the initial stages of nationalisation, novel approaches were introduced such as ceding of primary agricultural credit societies by nationalised banks, sponsoring of the farmers' service societies and large sized Adivasi multipurpose societies by the nationalised banks. However, in the absence of any serious monitoring on the part of the RBI, banks did not implement such excellent innovative concepts which could have been cost-effective and result-oriented. It is most essential to revive the implementation of these concepts and have them monitored by the RBI and NABARD for better results. For improved input delivery and marketing produce, large sized multi purpose societies as also functional societies should be organised by banks as subsidiaries so as to provide backward and forward linkages in the rural areas. Banks including co-operatives and RRBs should have manpower planning policy focussing need- based recruitment, placement, training, transfer and promotion of the staff for rural branches, instead of ad-hoc arrangements.

Wanted:a wider perspective

As agriculture is an integral part of the rural economy, the focus of RBI policy should be on rural lending rather than on agricultural credit. If this is adopted, the rural house-hold will be able to use the loan for any productive purpose including processing, non-farm sector and service and business sector. Also, for this purpose, there is immediate need for introducing a cash credit system with a limit fixed on the basis of 50 per cent of fixed and 25 per cent of movable assets. This could be tried on a selective basis by one bank in one state.

The issue of recovery of loan should be addressed very boldly and squarely and general write-offs or waiving of loans or interest by ministers or political parties should be banned. it should be the responsibility of the state to help banks in recovery of loans so that quick recycling of funds improve the rural economy in the concerned state. This should be monitored by the RBI and NABARD. Even NGOs and educated unemployed youths can be involved in banks' recovery efforts.

Sponsoring of loan proposals should be done away with and the office of the DRDA and DIC should be utilised for providing the much needed extension support. Similarly, provision of subsidy has to be made for building up rural infrastructural facilities. This will help inculcate financial discipline among borrowers.

The responsibility of structuring an Annual Action Plan for lending in the district and monitoring its performance on a quarterly basis be taken away by NABARD's district development managers from the lead district managers (LDM) of the lead bank. The LDM's office has not developed the required capability to exercise the kind of leadership over other banks, and more particularly, government departments. Similarly, agriculture and rural development being a state subject, the state should be made increasingly responsible for its development through creation of infrastructure and providing linkages for uninterrupted flow of credit.

Thus, when the existing private banks have been finding the going difficult, the proposal of setting up new banks for three contiguous districts surely would not serve any useful purpose. In this context also, what is required is to ask the existing private banks to lend to the small-scale sector (both in urban and rural areas), and to agriculture. They should be encouraged rather than penalised by being asked to provide funds at eight per cent to NABARD.

If these policy changes are brought about, the existing rural credit institutions would themselves contribute to the rural economy build-up much beyond expectations. No additional tiers would be required.