As with CDR, a similar amount is locked up as dud bank credit within the priority sector advances too
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 governmentís 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. RBIís latest