By Dr Amrit Patel
The Government of India and Reserve Bank of India [RBI], acknowledging the significance of the role of formal credit for agricultural development and growth, initiated a policy to progressively institutionalize agricultural credit system and expand it beyond cooperative credit structure by nationalizing private banks in 1969, establishing regional rural banks in 1975 and subsequently licensing private sector banks [PBs] since January 1993 and 2001 during the post-reform period. Policymakers have realized that the banking system in India should grow in size and sophistication to meet the challenges of an emerging economy and extend the geographic coverage of banks to improve rural households’ access to banking services.
Accordingly, as of March 31, 2011, the Indian banking system purveying agricultural credit comprised 31 state co-operative banks, 370 district central co-operative banks, 94,647 Primary Agricultural Credit Societies, 20 State Cooperative Agricultural and Rural Development Banks, 697 Primary Cooperative Agricultural and Rural Development Banks, 26 public sector banks [PSBs], 82 Regional Rural Banks, four Local Area Banks, 13 old private sector banks and eight new private sector banks.
With the induction of private banks in the dispensation of rural credit, the average population coverage by a commercial bank branch in rural and semi-urban areas declined from 17,200 as on end-June, 2005 to 15,900 as on end-June, 2010. The Indian financial system has made impressive strides in resource mobilization, geographical and functional reach, financial viability, profitability and competitiveness. However, vast segments of the rural population, especially the underprivileged sections of the agrarian economy, have still no or grossly inadequate access to formal banking services.
The RBI has considered licensing a limited number of new private banks since a larger number of banks would foster greater competition, and thereby reduce costs, and improve the quality of services. More importantly, it would promote financial inclusion, and ultimately support inclusive economic growth, which is a key focus of public policy.
This paper briefly reviews[i] aggregate performance of existing 21 private banks as a group in respect of a share of rural and semi-urban branches in the total, credit per branch, aggregate credit to agriculture and its share in net bank credit, credit to small farmers, non-performing assets [ii] performance of individual private banks in respect of direct and indirect credit to agriculture and their share in net bank credit, and non-performing assets. It, also, suggests a strategy to improve the performance and contain the non-performing assets.
Branch Network: PBs from 1993 to 2011 established 8,613rural, semi-urban and urban branches to provide agriculture credit in particular and rural credit in general. This accounted for 71.8% of their total 12,001 branches of which 10.9 % are rural and 32% semi-urban branches as against the mandated requirement of 25% rural and semi-urban branches.
Agricultural Credit: Between 2002 and 2011 [i] share of PBs in the total outstanding agricultural credit [of PSBs and PBs together] progressively increased from 10.2% to 18.2% and indirect agricultural credit from 5.64% to 16.67% [ii] compound annual growth rate [CAGR] of total and direct agricultural credit of PBs was 34.07% and 42.15% respectively. As on end-march 2011, the share of total and direct outstanding agricultural credit among 21 PBs adjusted Net Bank Credit[ANBC] varied significantly from 8.5% to 15.9% and from 4.3% to 11.4% respectively as against mandated 18% and 13.5% respectively.
Though PBs doubled agricultural credit disbursement between 2004-05 and 2006-07 as stipulated by the Government, the increase in the outstanding level of agricultural credit could not reflect in increasing its share in ANBC of the individual banks as also banks as a group of PBs. Of course, some gains in increasing outstanding up to 2008-09 might have been partially wiped out by the implementation of the Agricultural Debt Waiver and Debt Relief scheme announced by the Government. Total and direct outstanding credit per branch of PBs was Rs.106.971 million and Rs.69.712 million respectively.
Special Agricultural Credit Plans: The RBI advised PBs in 2005-06 to formulate and implement the Special Agricultural Credit Plan [SACP] annually to increase credit flow to agriculture. Under the SACP PBs are required to fix self-set targets during the year, which are generally 20% to 25% higher than the previous year’s credit disbursement.
This helped PBs increase credit disbursement during 2005-06 to 2009-10, accounting for 108.5% of target in 2006-07 and 128.8% in 2005-06. The CAGR of targets during 2005-06 to 2009-10 was marginally higher at 26.67% than that of achievements at 25.93%. PBs fixed targets higher by 30.3% in 2006-07 and 19.8% in 2008-09 and less by 6.1% and 2.2% in 2007-08 and 2009-10 than previous year’s disbursements reflecting low priority on business planning.
Credit to Small & Marginal Farmers: From 2007 to 2011 outstanding credit to small and marginal farmers marginally increased from 0.64% to 2.82% of ANBCwhereas share of outstanding credit to small and marginal farmers in total direct credit progressively increased from 7.64% to 25.03%.As of end-March 2011, 11 PBs out of 20 had this percentage below 4% of ANBC whereas five PBs had 9% of ANBC and above. TheCAGR of outstanding credit to small and marginal farmers was 62.79%.
Individual Banks: Due to the merger of one bank number of PBs declined from 23 in 2008 to 22 in 2009. Data on agricultural credit among individual banks from 2008 to 2011 revealed that aggregate direct credit of all PBs was 64.7% of total credit in 2008, which significantly declined to 58.1% in 2010 and then rose to 65.2% in 2011. Percentage of direct credit to total credit among individual PBs exhibited wide variation from 6.1% to 91.0% , from 10.0% to 87.1% , from 11.8% to 93.5% and between 55.6% and 96.2%.Numbers of banks accounting for 75% and more direct credit to the total were only seven in 2008, declining to six and four in 2009 and 2010 and rising to 10 in 2011. In 2008 only six PBs achieved total agricultural credit targets of stipulated 18%which increased to eight each in 2009, 2010 and 2011.
Only five banks [Catholic Syrian bank, Dhanlakshmi bank, Yes Bank, Nainital bank and TamilNadu Merchantile bank] achieved total agricultural credit targets of 18% and with Lakshmi Vilas Bank they achieved direct agricultural credit targets of 13.5% in all four years as stipulated. Seven banks [Axis Bank, Development Credit Bank, Yes Bank, HDFC Bank, ICICI Bank, Karnataka Bank, and Ratnakar bank] achieved 4.5% indirect agriculture targets in all four years as mandated. Only two banks [namely Yes Bank, and Dhanlakshmi bank] achieved targets of direct, indirect & total agricultural credit as stipulated in all four years.
Non-Performing Assets [NPAs] in Agriculture: Data on NPAs in various segments of financing by PBs and all Scheduled Commercial Banks [SCBs]in 2010 and 2011 revealed that NPAs of PBs in agriculture accounted for 11.6% in 2010 and 12.1% in 2011in total NPAs and were significantly higher than that in small scale industries [SSI] and others within priority sector credit, whereas NPAs in non-priority sectors were as high as 72.4% and 73.2% in respective years.NPAs of PBs in agriculture in 2010 and 2011 were significantly lower than that for all Scheduled Commercial Banks [SCBs] at 13.9% and 18.7% in respective years.NPAs in agriculture in 2011 increased by 7.4% over 2010, which were significantly lower than that in SSI but significantly higher than in sectors viz. others, non-priority and public sector.
NPAs in agriculture of PBs recorded insignificant growth in 2011 over 2010 as compared to 60.9% for all SCBs.NPAs in agriculture of PBs accounted for 19.54% of all SCBs in 2010 which significantly declined to 13.04% in 2011. However, they were significantly higher than NPAs in priority sectors, SSIs and others but were significantly lower than NPAs in non-priority sectors, public sector and total in both the years. Three banks together in 2010 and four banks in 2011 contributed to 82.5% and 83.5% of NPAs.
NPA in Agriculture of Individual Banks: Data on NPAs in agriculture of individual banks during 2008 to 2011 revealed that aggregate NPAs of all PBs in agriculture in 2008 was Rs.1467 crore which declined marginally to Rs.1441 crore [98.2%] in 2009 but then increased significantly to Rs.2023 crore [140.4%] in 2010 and to Rs.2171 crore [107.4%] in 2011 over the previous year. The share of aggregate NPAs in agriculture in the total NPAs declined significantly from 11.3% in 2008 to 8.5% in 2009.
However, it significantly rose to 11.6% in 2010 and to 12.1% in 2011. The aggregate NPAs in agriculture accounted for 2.5% of outstanding agricultural credit in 2008 which declined to 1.9% in 2009. However, it rose marginally to 2.2% in 2010 and 2.4% in 2011. The share of agricultural NPAs in total NPAs of individual banks ranged widely from 1.89% to 17.5% in 2008, from 2.3% to 21.6%.in 2009, from 2.5% to 34.9% in 2010 and from 4.5% to28% in 2011. NPAs in agriculture of individual banks varied from 0.1% to 5.5% of outstanding agricultural credit in 2008, from 0.4% to 2.8% in 2009, from 0.4% to 4.2% in 2010 and from 0.3% to 7.2% in 2011.
Two banks in 2008 and three banks in 2009 [each with NPAs more than Rs.100 crore] accounted for as high as 74.3% and 76.2% NPA respectively in total NPAs in agriculture whereas three banks in 2010 and four banks in 2011 [each with NPAs more than Rs.100 crore] had a shared high as 82.1% and 83.6% NPA respectively in total NPA in agriculture. Two banks, namely SBI C& I and Yes bank did not report any amount of NPAs in agriculture in any of the four years.
Efficiency Parameters: Despite the late entry of PBs in the field of financing agriculture and limited presence in rural and semi-urban centers, their performance compares favorably well with that of public sector banks in most parameters and PBs have relatively low level of NPAs in agriculture.
Incidentally, data on the efficiency parameters of 26 PSBs and seven new PBs for 2010-11 reveal that PBs have significantly performed better than PSBs, viz. PBs had profit/employee [Rs.8,93,000],wages as percentage of total expenses[13.83%], return on assets[1.51%] and net NPA ratio[0.67%] as against Rs.5,93,000; 17.27%; 0.96% and 1.09% respectively for PSBs. Business/employee of PSBs was Rs.10.1363 crore as against Rs.8.2607 crore of PBs reflecting quality rather than quantity.
Strategy: Strategy to improve performance and contain NPA needs to focus on following initiatives by banks and Government.
Banks: As on end-March 2012, all PSBs, PBs and RRBs together have provided banking connectivity to 1,47,534 villages out of 6,38,387 as against 54,258 villages in March 2010. Almost all 74,000 villages with more than 2000 persons have been connected with banks. In April 2011, banks have been mandated to allocate at least 25 % of all new branches to unbanked rural areas and open intermediary brick and mortar structure between the base branch and customer locations, which can bring efficiency in cash management, documentation, supervising Business Correspondents’ operations and redressing customers’ grievances.
- Now banks have to reach to villages with persons between 1000 and 2000 through a combination of brick and mortar structure with technology application in geographically dispersed areas. Currently, PBs have branches in 8613 centers only. They can establish additional branches at strategic locations and make effective use of technology to provide banking services in four-five villages around the existing branch and in remote areas through the Business Correspondent model.
- They should continue their efforts systematically in villages already connected to widen and deepen clientele outreach by putting in place rural-friendly human resource development and training policy, formulating a five-year prospective business plan, developing new financial products and marketing strategy.
- PBs can benefit much from the field experiences of PSBs, RRBs and cooperatives for financing farm mechanization, irrigation development, vegetable cultivation, horticulture and plantation, aquaculture, floriculture, sericulture, agro-processing, dairy, livestock and fish farming, among others.
- Products and approaches viz. Kisan Credit Cards, value chain, contract farming, warehouse financing and finance lease can substantially enhance agricultural financing, covering small and marginal farmers.
- Formation and nurturing of self-help-groups and Joint Liability Groups of landless laborers, tenant farmers, small and marginal farmers, sharecroppers and oral lessees can facilitate efficient use of farm credit for productive purposes.
- Financial sustainability of PBs can be enhanced through providing full range of financial services, viz. savings, remittances, insurance and credit to farm and non-farm sectors in rural areas through business planning. They should focus on farmer-friendly lending procedures, systems & methods, evaluate periodically and redesign to meet clients’ needs.
Farmers’ inability to withstand against unfavorable climate, drought, floods, adopt yield-maximizing technology and secure remunerative prices jeopardized their capacity to larger an extent rather than their unwillingness to repay loan. This created NPAs in agriculture. In order to contain and efficiently manage NPAs in agriculture strategic actions need to focus, inter alia, viz.
- Effective inter-institutional coordination and supervision over end-use of credit, accompanied by timely restructuring loans, rescheduling repayments, interest waiver and write off, as the case may be, as advised by RBI would help minimize the incidence of NPAs.
- Analysis of data on NPAs [absolute amount, its percentage in outstanding agricultural credit, its share in total NPAs, etc.] by individual banks operating within a district each year can help assess comparative performance among banks. This would help Bank managers identify the factors responsible for building up NPAs in agriculture in the district, discuss at District Level Coordination Committee [DLCC] meeting and seek cooperation of village Panchayats, Block& District Authorities to reduce NPAs. These institutes need to appreciate that bank credit is a catalyst for rural development and they need to help banks in mobilizing loan recovery on time.
- Each Bank’s controlling office should analyze data on NPAs district-wise within the State and data on NPAs must be incorporated district-wise and bank-wise in the Annual State Focus document prepared by NABARD for discussion in the State Level Bankers Committee meeting and devising appropriate policy and strategy to contain the growth of NPAs.
- PBs must train farmers for their capacity building rigorously under the program of financial literacy and debt counseling developed by RBI. PBs should also train their staff in rural branches for capacity building and enhancing rural credit management skills.
Government: Union and State Governments have a pivotal role in creating an enabling environment that can sustain the flow of credit to agriculture and borrowers repay loans on time. These include the following, among others.
- Swiftly passing the bill “Women Farmers’ Entitlement Bill, 2011” proposed by Dr. M..S. Swaminathan that seeks, inter alia, access to water, credit and inputs, legalizing pattas [land rights] for women and tenant farmers.
- Investing adequately in creating infrastructure to connect progressively all villages by roads, transport and communication network; strengthen agricultural research and extension services; establish State-of-Art agricultural meteorology in all agro-ecological regions and introduce weather-based crop insurance; develop floods and drought codes, harness irrigation potential and maximize utilization; create agro-processing, storage and marketing facilities.
- The government must refrain from announcing a wholesale loan waivers and write off and, in any case, it should not vitiate repayment climate and culture. Instead, it should create a conducive climate that can motivate borrowers to repay loans timely.
- Disassociating from regulating commercial banks and leaving it exclusively to the Reserve Bank of India, which can devise regulatory policies in line with international best practices including, inter alia, demand-driven credit rather than supply-led subsidized credit.
- Government departments and agencies, in close coordination with banks, should help beneficiaries prepare quality proposals under Government schemes for availing bank credit along with capital subsidy and help banks in the recovery of loans.
- DLCC should monitor and review all credit-based development schemes and help create an infrastructure that can enhance the credit absorption capacity of the geographical area and clients.