Now juxtapose this with the Reserve Bank of Indias (RBI) directive to banks on meeting priority sector lending. It has urged them to focus on direct lending instead of indirect lending which is a more popular method with these banks.
The picture is a bit diffused. And no one wants to go on record as you run the serious risk of getting rapped on your knuckles.
It is no big secret that very few private banks are being able to meet these norms.
According to the RBI, private sector banks are supposed to lend 40 per cent of their portfolio to the priority sectors.
Of this ratio as well the eye in the storm is the 13.5 per cent of the total credit that has to be directly disbursed to the agricultural sector.
Private banks with their predominantly strong urban network find it nearly impossible to approach farmers and dole out credit to them.
We are sitting here in a metro with a dominantly urban network. With such a set-up, it becomes nearly impossible for us to distribute credit to farmers. Failing to meet the regulations we are penalised, says a banker who deals with the issue in a private bank.
In case a bank fails to meet the norms, it has to park its funds with the National Bank for Agricultural and Rural Development (Nabard) in the Rural Infrastructure Development Fund (RIDF).
Another banker with a small private bank says: For smaller banks like ours, it becomes very difficult to meet the norms. And the further away we are from the target, the more we have to contribute to the RIDF at abysmally low rates of interest. This in effect makes no business sense. With the spreads on interest rates coming down, if we have to park a substantial amount of our funds there at sub-cost rates, the profitability of the bank goes for a toss.
He also adds that since these banks are not physically present in these rural areas, but still are forced to make credit available to farmers leads them to lend in desperation to unviable projects.
The cases of high non-performing assets (NPAs) in the priority sector is due to the anxiety of banks to lend to anyone or an entity qualifying under the priority sector.
The current years drought situation in the northern states has made the situation worse for banks who have a dominant presence in the effected states.
Even if the banks are willing to give credit, there is no offtake in the northern states because of the drought. Banks such as ours fall back on the agricultural credit front and the drought has done nothing to help the situation, says a senior banker with a bank which has a predominant in the northern states.
These banks also have to contribute to government sponsored schemes where the local administration nominates the beneficiaries and the banks are obliged to give credit to these individuals.
The local administrations in most cases think that their job is over with the nomination of the person which, often is not based on the credit worthiness of the nominated. Post-nomination, the bank is obliged to part with the money and there is no one to ensure that the money is being used for the stated purpose.
The default rate in these cases is the highest as the local administration which selected the person, does not help at the time when the amount comes up for repayment. If we are made to lend at their advise, they must stand with us on the recovery front, adds the banker.
The new generation private banks are finding themselves in a bigger soup as they are operating in the same market as the foreign banks and have to meet RBI regulations similar to those for state-run banks.
We find ourselves in a disadvantageous position as we operate more or less on the same ground with the foreign banks and have similar expenses and markets. We would like to be put on an even platform with them and be exempted from direct agricultural lending, says a senior banker with a new generation private bank. Bankers across the board feel that there is not much possibility of a respite for them as the whole issue is politically motivated and leaders are unlikely to let go of their vote banks for sake of some rich bankers.
Also it is an excellent way to mobilise funds for government organisations at sub-cost rates.