Credit Policy: A Tale Of Two Reports

Updated: May 31 2004, 05:30am hrs
The 18th of May did not make much difference to several corporates, nor did it unleash any great expectations. But it contained the tale of two reports: one on agricultural credit and the other on the small and medium enterprise (SME) sector. A look at the reports presents the tale of hope and despair.

The first, the Vyas Committee Report on Agriculture comprehensively addressed the issues of both banks and farmers with concern and equanimity. The issue of non-performing assets (NPAs) found an answer. Farmers and farmer associations cant ask for credit in the morning and for its write-off in the evening. It is this ambivalence that needs to be addressed. Why do they do this

They know for sure, that they cant live without institutional credit. But the lending institutions are not anxious to reach out to the farmer. The Service Area Approach (SAA) required amendment and this found an answer. The underlying principle in this approach is that banks must annually survey villages in their area of operation and prepare an action plan. The National Bank for Agriculture and Rural Developments perspective plan for each district is not a substitute as it is not owned up by banks, while the SAA plan prepared by the branch within its resource endowment embedded into the Annual Business Budget, has a chance of ownership and commitment to it.

The issue of high transaction costs in farm credit arising on account of both risk assessment and supervision, could be appropriately addressed if farm lending procedures and accountability issues get the attention, they deserve.

In the farm sector, each season, each soil, each crop and each cash cycle has a specificity, which could be understood only when the banker has his mind-set right and has the ability to learn
Unfortunately, the 1991 loan write-off triggered an environment of mutual acrimony among farmers and bankers at a time when institutional credit mechanism was getting in place. Private money lending raised its ugly head to the proportion of suicides by farmers.

Unlike in the case of a large industry, where a banker can look to literature on the activity for which he is lending, in the farm sector, each season, each soil, each crop and each cash cycle has a specificity which could be understood only when the banker has his mind-set right and has the ability to learn. This mind-set can turn positive if the field supervisors sense the seriousness of the farm lending goals driven by the bureaucratic fiat.

The rural infrastructure development fund an escape route for banks that skip the targets in farm lending an instrument devised with good motive by the then finance minister and the current Prime Minister, needs a fresh look from the point of the coupon rate. The Vyas Committee addressed this issue rightly. Let the coupon rate be at least two per cent less than the Bank Rate. Reserve Bank of India (RBI) Governor YV Reddy, should have heaved a sigh of relief at a time when the farm sector demonstrated its electoral power to install a government which promised a better deal to them, both in the states and the Centre.

The Dr Ashok Ganguly Committee glossed over the main issues of effective credit delivery to the SME sector. Redefining the sector would not effectivise the credit delivery. When 88 accepted recommendations of the SL Kapoor Committee and 64 of the SP Gupta Committee failed to do it, when the Kohli Committee Report on Sick industries rehabilitation became ornamental, eulogistic approach is no solution.

It mentioned of risk aversion, but did not offer any solution. It failed to mention the reasons for the poor off-take of the Technology Modernisation programme, despite relief measures from the Centre and SIDBI, aimed at making it more effective.

The Report also did not deal with the structural issues in the SME credit delivery. The 1997-98 Manmohan budget created specialised SSI branches for effective credit delivery. These branches have diluted their branch budgets to consist of only 50 per cent of the credit flow to the SSI units and this bears the endorsement of the RBI. Why did it happen that way No analysis and no solutions.

Now the question of NPAs. According to the RBIs latest instructions, any account, where the principal and interest fall in arrears for 90 days beyond the due date, assumes the status of an NPA, as against 120 days till 31st March 2004. This would swell the NPAs in the SSIs faster.

Delayed payments for accepted goods could be blocked and put into separate account for realisation in due course. In my recent study on Sickness in SSIs in Andhra Pradesh, several banks openly admitted that it is better to give one-time-settlement (OTS) than to rehabilitate the unit.

Clusters are take time to form. After five to seven years of intervention, the UNIDO had its stories of success to tell on the cluster. Similarly, the Textiles Committee has been putting in considerable efforts untiringly to bring about clusters in its command. The results are yet to come by.

Clusterisation should not assume the proportions of a slogan, equivalent to the erstwhile tarnished integrated rural development programme. In the mean time, what would happen to the SSIs, widely dispersed and still breathing some air

No solutions could be found in the Report. Enlivening the agricultural sector prevents migration and suicide deaths, while that of the SSI sector creates employment opportunities. The RBI has to create an environment for better delivery mechanisms and better monitoring.

The author is managing director, Sandilya Consultants Private Ltd and former Dean of Studies, Administrative Staff College Of India