The sense of outrage in India tends to move in such a high octane drive that even prosaic subjects like bank credit often become a victim to it.
The current outrage billowing around concerns the amount of bank credit that has got locked up in the corporate debt restructuring cells. What often does not get the same attention is that a similar amount is locked up as dud bank credit within the priority sector advances too.
Under the scheme for priority sector loans, banks have the option, if they cannot fulfil their target of lending 18% of their credit to the farmers, to instead invest the sum with the Rural Infrastructure Development Fund (RIDF). The fund is run by the National Bank for Agriculture and Rural Development (Nabard), which extends loans to state governments to finance their investment programmes for rural infrastructure including minor irrigation, roads and even warehouses. Data from Nabard and the ministry of finance shows that, since 2009, state governments put together have not used more than 67% of their allocated sum from the fund. For the current year, it has dipped to an abysmally low level of 41%.
The money is available but the state governments, normally shrill about the lack of funds available with them to finance development expenditure, are missing in action. Of course, there is a caveat here. The money drawn from RIDF carries an interest rate 0.5% more than the bank rate set by RBI. Plus, the loan outstanding creates a charge on the state governments current account, which means the repayment schedule gets switched on automatically (tenor: seven years including two years of grace period). This explains why states may be reluctant to get into these loans.
But forget about what happens with the states. There is the issue of bank solvency involved here. RIDF is financed from bank credit that could have been used elsewhere. But the directed nature of lending means at least 18% of bank credit will be sequestered here every year. RBIs latest data shows that of the total priority sector lending as on November 30, 2012, of R14,617 billion, the share for agriculture is R5,495 billion.
Since the RIDF sum outstanding as on the same date is R11,722 crore, the extent of backlog that has got generated is evident.
Since the money has been lent out by the banks, when the states do not pick up their share of funds, the service charge on these loans is made good by Nabard. As a public sector unit, this, in turn, means a draw on the public exchequer. This is a sort of circular lending that does little to improve the availability of bank finance for the economy.
As the numbers in the table show, the slippages of loans picked up by states from Nabards own long-term ballpark average of about 85% is considerable. For an economy to stash away borrowed funds of this size without commensurate returns means a serious worsening of its risk profile.
Juxtaposing the numbers against the usual suspect, i.e. the corporate sector, makes for interesting reading. It is obvious and expected that the corporate sector is naturally the biggest defaulter of bank loans. As on September 30, 2012, the CDR mechanism has a collective debt of R64,000 crore.
That sort of delinquency is simply impossible to visualise for the agricultural sector. But when out of R64,496 crore sanctioned for the sector in four years just two-thirds gets utilised, that too is a non-performing asseta state-induced one but definitely something that potentially could hurt the top line of the banks. The net result is that the returns on capital are pulled down for the economy.
Within the RIDF corpus, the most capital-intensive projects are the minor irrigation projects. A look at the irrigation projects sanctioned again, for the same four-year period, shows the pace of investment is coming down here. At an all-India level, in 2009-10, from the R4,127 crore sanctioned from RIDF, only 81% was used. The picture improved a bit in 2010-11 but has plummeted in the last two years.
There is a major economic policy failure at work here. Rural investment programmes proceed independent of market forces. Which means, in periods when the economy is down, these public spendings could revive investments. But the pace of drawal from RIDF shows this opportunity has been wasted.
Here too, the disaggregated state figures show that, typically, the performing states that do the best on all parameters tend to succeed in raising public investments. So, Gujarat, Tamil Nadu and Chhattisgarh have done exceedingly well in terms of projects sanctioned and money disbursed in public investment. This also partially explains the pro-cyclicality in the spending pattern of public finances in India.
RBI has recently decided that foreign banks now will have to graduate to allocating 40% of their funds for priority sector lending. This will mean sequestering another huge set of funding for rural areas. When the rural sector is unable to use with efficiency the available money, it is difficult to picture how the additional funds will be of more use to it and, consequently, for the rest of the economy.
The foreign banks are not equipped to secure farmer borrowers or most other sectors as far as rural India is concerned. So, it is on the cards that they will invest even more funds with RIDF. This is surely counter-productive. For instance, in 2011-12, Nabard allocated R1,494 crore for the construction of warehouses through the state governments. Less than 23% of the sum was used by them. In the current fiscal, till the end of October, the utilisation level has been nil. Once the economy turns around, demand for credit would stretch the system. Keeping good amounts in pockets like RIDF will make little sense then.