With a view to giving a boost to the process of farm sector development & micro-credit program Government of India & Reserve Bank of India have very aptly crystalized certain specific policy prescriptions during the year 2006-07 & directed the banking system to put in concerted efforts so as to accelerate the flow of credit to agricultural sector & clients of micro-credit program & achieve expected results. It is in this context an attempt is made here to appreciate the need for banks’ commitment & formulating strategic action plan to increase the flow of credit to farm sector & clients of micro-credit against the background of recent key developments in this area.

Recent Developments

Agricultural development and enhanced & continuous flow of credit to this sector is very crucial at this juncture in view of following recent developments & findings of surveys.

1.       Massive statistical data clearly establish that there is a concentration of poverty & distress in the dry lands, hilly, tribal, drought prone & desert areas. This phenomenon of regional imbalance in India’s development finds official recognition in the Planning Commission’s recent Report of the Inter-Ministry Task Group on Redressing Growing Regional Imbalances that has developed a list of 170 most backward districts including 66 extremist affected districts. Prime Minister hinted at the resolution of this problem in his Independence Day speech last year when he desired Government’s intention to set up a National Authority for Sustainable Development of Rainfed Areas [NASDORA]. The Parthasarathy Committee Report on NASDORA has now been accepted by the Government & is being studied for its implementation.  

2.       For the first time since the mid-1960s, foodgrain production grew slower than population in the 1990s. The output of crops grown & consumed by the poorest of the poor & cultivated largely in drylands actually declined during the decade & the rate of growth of their yields decelerated considerably.    

3.       In a candid acknowledgement of the enormity of problem of farm sector development Prime Minister Dr. Manmohan Singh, in his recent inaugural address at the 93^rd session of the Indian Science Congress, dwelt upon the need for second Green Revolution with a special focus on dry land agriculture and small & marginal farmers. He called upon scientists to devise appropriate & affordable, labour-using technologies for energy & water, especially designed for farmers of drought-prone regions.

Banks’ initiatives

Banks have responded very favourably & taken following initiatives in fulfilling their commitments of previous year’s budget.

• Commercial banks & RRBs had together financed 6.632 million new farmers during the year 2004-05 against the targets of five million new farmers whereas cooperative banks had financed 1.252 million new farmers. Total number of new farmers financed were 7.884 million.

• Loans granted to tenant farmers, oral lessees & share croppers was of the order of Rs. 3600 million accounting for 1.65 per cent of total loans to new farmers.

• Amount of Rs. 117,104.4 million was provided as debt relief by all agencies as on 31st March’05.
  4. While farmers in distress received the highest assistance at 75 per cent, it was 18 per cent in case of farmers in arrears & seven per cent as one time settlement.

• Commercial banks extended loan facility amounting to Rs. 570 million to 16,758 farmers indebted to informal sources [money lenders] to redeem their debts.

Micro-credit

The program is implemented in 31 States & Union Territories covering 572 districts of the country. As on 31st March’05, 1,618,456 SHGs were linked with 41,082 branches of 573 banks [27 public sector,&20 private sector Commercial banks, 196 RRBs & 330 Cooperatives] & provided credit amounting to Rs. 68,984.60 million which indicated that

• Number of SHGs per Bank were 17,946 with bank credit of Rs.884.89 million & per branch were 39.4 with bank credit of Rs. 1.679 million.

• Number of SHGs per commercial bank were 11,217 with bank credit of Rs.469.75 million.

• Number of SHGs per RRB were 2,876 with bank credit of Rs.107.12 million.

• Number of SHGs per cooperative bank were 63.8 with bank credit of Rs.19.39 million
  Among 27 Public Sector Banks, State Bank of India had linked the highest number of SHGs with credit [250,460; Rs 11,592.01 m] followed by Andhra Bank [101,468; Rs. 5,628.07 m]& Indian Bank [65,828; Rs.4,472.89 m]. These three banks among 27 nationalized banks accounted for a lion share of 51.56 per cent SHGs[ 810,175] & 56.85 per cent of bank credit[ Rs.38,158.93 million]

Among 20 Private Sector Banks ICICI Bank was the first to link highest number of 11,009 SHGs with credit amounting to Rs. 2,654.89 million followed by the Vysya Bank [6,721; Rs.276.97 m] These two banks had a share of 53.25 per cent of total SHGs [33,298] & 85.44 per cent of total bank credit [Rs. 3,431.26 million

While all 196 RRBs had participated under the micro-credit program, Pandyan Gramin Bank in Tamil Nadu had linked the highest number of SHGs, followed by Nagarjuna Gramin Bank & Sri Visakha Gramin Bank in Andhra Pradesh. Other banks viz, Koraput-Panchbai Gramin Bank, & Kalahandi Anchalik Gramya Bank in Orissa & Gorakhpur Kshetriya Gramin Bank in Uttar Pradesh showed appreciable performance.

Cooperative Banks were late entrants on the scene as the amendments had to be made in the respective Co-operative Societies Act to enable cooperative banks to promote, form, nurture & link SHGs with bank credit. District Central Co-operative Banks viz, Bidar [Karnataka], Mugberia & Hoogly[ West Bengal] were pioneer to take lead under the program paving way for others. Hooghly DCCB in West Bengal had linked the highest number of SHGs followed by Tiruchirapalli DCCB in Tamil Nadu & Hassan DCCB in Karnataka. Others having performed appreciably were Bidar DCCB & South Canara DCCB in Karnataka & Mugberia DCCB in West Bengal. Commercial banks’ performance as on 31st March’06 is given in following table.

Banks’ commitment needed

Banks’ commitment is called in following key areas for improving effectiveness of micro-credit program immediately in order to appreciate that only 24.27 million persons [12.6%] have been so far assisted under the program as against 193 million people living in abject poverty in rural India. Besides, the program is expected to achieve the objectives viz [i]successfully contributing to lifting people out of poverty [ii] to benefit women in particular & empower them [iii] contributing to the social & human development process & [iv] providing access to capital through micro-finance instruments such as credit, savings & related business services.

• The performance in respect of linking SHGs with banks during the period from 1992-05 can hardly be considered satisfactory as only five commercial banks, three RRBs & three DCCBs have performed well. The performance of 42 commercial banks, 193 RRBs & 327 DCCBs need to be improved significantly by drawing a time bound strategy & action plans for each of the banks year-wise. Regional office of the National Bank may need to review & monitor individual bank’s performance at the state level on a quarterly basis. This is most essential from the fact that during 13 years’ very long period only 41,082 branches [73.4%] of 573 banks have linked 1,618,456 SHGs with credit of Rs. 68,984.60 million as against total number of 56,000 branches of commercial banks [30,000], RRBs [14,000] & District Central Cooperative Banks[12,000] in rural areas. This showed that number of SHGs per branch were 28.9 with bank credit of Rs. 1.232 million taking into account 56,000 ranches. Thus, growth of SHGs & amount of credit provided per branch during the period of 13 years was poor. While 14,918 branches [26.6%] have yet to be involved under the program there are several branches having linked very few SHGs. This can be attributed to the profit-driven approach of banks. Besides, there are 112,000 Primary Agricultural Credit Societies at village level which have so far not provided credit to any SHG. Active involvement & full commitment of all rural branches of commercial banks & RRBs as well as all DCCBs under the program is called for as the recent report of the Council for Social Development & Oxford has brought out following areas of serious concern.

• It is most essential to cover all villages from the hilly, tribal, desert, drought prone & most vulnerable regions of the country in next three years under the SHGs-Credit Linkage Program as these are the most vulnerable areas where private money lenders exploit rural poor. Only three States of Andhra Pradesh, Tamil Nadu & Karnataka have a lion share of 54.17% SHGs [876,823] & 72.11 % bank credit [Rs. 49,747.46 million] depriving 12 States & NE & KBK regions in particular.

• Out of 1,618,456 credit-linked SHGs only 21 % have been formed, nurtured & financed directly by banks whereas in 72 % cases NGOs have organized, formed, nurtured & trained SHGs which were then financed by banks. In other seven per cent cases not only NGOs have organized, formed, nurtured & trained SHGs but also NGOs have received bulk loans from banks & they have on-lent to SHGs. This reflects upon banks’ inactive & non-committal role under the program. Thus, it is essential that after 13 years’ experience banks must not heavily depend upon NGOs in all respects. Banks’ involvement & commitment would only be realized & felt transparent if they initiate this exercise rather than merely linking SHGs with credit.

• As on 31st March’05, 1,618,456 SHGs were provided bank credit of Rs.68,984.60 million indicating bank credit of Rs. 42,624 per SHG. Thus, credit per member of the SHG worked out to Rs. 2,841, as each SHG had 15 members. Loan amount to existing SHGs may need to be increased progressively by providing repeat loans through mutual dialogue by banks with SHGs & their members taking into account member’s family expenses, income, cash-flow & capacity to repay. Micro-credit program through provision of financial services is expected to reduce vulnerability & increase earnings & savings which should enable them to transform from” every-day survival” to “ planning for the future”.

• As a large number of SHGs which were promoted, credit linked & nurtured in 1992 & onwards have completed several years it is time to provide to them repeatedly repeat credits for economic activities that can release the potential of the productive capacity of assets of members of SHGs and thereby increase their income & reflect directly on their standard of living. Thus, same SHG can be provided first, second, third ,fourth etc trenches of credit from year to year or within the same year. Economic activities viz, watershed development, animal husbandry including backyard poultry, organic farming, mushroom farming, bee-keeping, rural/cottage industries under the purview of Khadi & Village Industries Commission, Coir/Handicrafts/Handloom/Silk Board and under service & business sector can be considered. The National Bank has also been promoting economic activities under rural non-farm sector through provision of financial & non-financial support. Banks can popularize these activities among SHGs by drawing the time bound strategy & action plan. Input & marketing agencies should be involved to provide backward & forward linkages in respect of economic activities proposed to be pursued by SHGs through bank credit.

• There is need to expand the scope of providing financial services that can at least include micro-insurance instead limiting to only savings & credit. Not only new & novel savings & loan products need to be designed by banks in consultation with SHGs & their members but also micro-insurance process & products should be designed taking into consideration ground realities & field studies according to different geographical & agro-ecological regions. Involvement of existing Life & Non-life Insurance companies [national & multi-national] is absolutely essential in this area to protect the lives & assets of members of SHGs. While designing the insurance products for SHGs experience gained so far in respect of crop & livestock insurance may need to be profitably utilized at least in terms of settlement of claims & claim settlement procedure.

• The National Bank & its District Development Managers have indeed, since its inception from the year 1992, taken tremendous initiatives in conceptualising, operationalising, & providing all the required financial & non-financial support including training to ensure that SHGs are linked with banks for receiving credit & other financial services. It is high time now that banks more importantly commercial banks & RRBs must commit & involve themselves in deepening & widening the program. For this purpose, these banks must now effectively play the role which National Bank has been playing. These banks in view of their existence in the geographical area & having familiarity with local population should be expected to expand their role much beyond mere providing credit to SHGs. Each of the branches of these banks can formulate result oriented action plan & strategy to promote as many SHGs as are required in each of their Service Area Villages. Within three years hence all families Below Poverty Line may be brought within the purview of this program. As there are around 112,000 Primary Agricultural Credit Societies at village level their long experience & familiarity with local population may need to be capitalised. National Bank may institute feasibility studies including their weaknesses viz, organizational, financial, managerial etc which can be converted into strength & evolve location-specific methodology of involving PACS in Micro-credit program.

• As witnessed in States like Madhya Pradesh where as many as 90 % of 390,000 SHGs as on 31st March’04 were formed by the Government departments had conceptual deficiencies & were heavily looking for Government assistance rather than bank credit under the streamlined procedure for SHGs. It may be appreciated, “ Let this Micro-credit program not follow the foot steps of earlier Integrated Rural Development Program” which was academically well conceived but failed during the implementation process.

• While banks are free to decide their lending rates to SHGs, banks lending rate varies from eight to 12 per cent per annum and SHGs subsequently lend to their members at around 24 to 30 per cent rate of interest per annum with weekly repayment schedules. Besides, as the National Bank is providing 100 per cent refinance at reduced interest rate banks are very keen to avail refinance as is evident from the fact that as on 31st March’05 banks disbursed credit amounting to Rs. 68,665.9 million out of which National Bank provided refinance of Rs. 30,924.3 million[45%] as compared to the refinance of Rs. 21,242.4 million against the credit disbursement of Rs. 39,042.1 [54.4%]million as on 31st March’04. It may be appreciated that interest rate to members of SHGs is extremely high, even if it may be comparatively less than the prevailing market rate. It is worth considering necessary that banks should avail refinance from National Bank as well as charge less interest rate to SHGs which should subsequently motivate SHGs to charge less interest rate to members. This would ultimately help members to make little comfortable living. Banks are mandated to lend at four per cent per annum under the Differential Rate of Interest scheme which has been in force since 1972 & achieve the target of half per cent of the total outstanding net bank credit as on the previous year. None of the banks has been able to fulfill the targets. Besides. Banks have a mandate to fulfill the targets of lending to women borrowers too. It is a sad commentary that helping the weak and the poor should be driven entirely by the profit motive of commercial banks as is evident in the evolution of micro-finance and is a depressing contrast to the numerous individuals and organisations engaged in selfless charity. Poverty in developing counties cannot be eradicated through profits under micro-finance program which started as cult & is now well on its way to becoming a growth sector like IT and many industry & market segments. It would, therefore, be prudent if RBI in consultation with National Bank & Banks redesign this DRI scheme to meet the credit needs of the clients of the Micro-credit program. Let the benefit of reduction in the interest rate help primarily members of SHGs as well as help SHGs create risk stabilization fund/build reserves at their level.

• Banks may need to ensure that MFIs should not exploit SHGs by charging exorbitant rate of interest, levying service charges and stipulating inconvenient repayment schedule as was unearthed in Andhra Pradesh where RBI & State Government had to intervene to put the system in order.

Need for Action Plan

In order to implement the policy prescriptions advised by the RBI all banks may need to formulate result oriented action plan covering following aspects.

While nationalised banks & regional rural banks have completed almost 37 years & 31 years respectively, co-operative banks have been in existence since 1904 to purvey credit to farmers. These rural financial institutions have been putting systematic & concerted efforts through micro-level planning at grass-root level since April, 1989 by formulating demand based village/service area credit plans on annual basis. District Development Managers of National Bank of Agriculture & Rural Development [National Bank] posted at each district having expertise in this field have been facilitating bankers of rural financial institutions in their efforts of channeling credit to agriculture & rural sector through formulating potential linked credit plan[perspective plans for five years & annual plans]. Thus, bankers have been very much familiarized with the rural scenario & have built up adequate expertise in evolving client/area-specific loan products & developing credit delivery mechanism which can accelerate the flow of credit on one hand & increase outreach on the other.

Having been involved for about 17 years in the area of formulating village/service area credit plan for each of their rural/semi-urban branches it may be well appreciated that by now a very large umber of rural households from each of the villages under their service area should have been brought within the banking fold in respect of mobilization of savings as well as deployment of credit.

It is now opportune time for the rural/semi-urban branch to prepare updated data base of all clients & non-clients residing in villages under its service area which can serve many purposes in the present context of market economy. While RBI has designed a very comprehensive format to facilitate bank staff to formulate village/service area credit plan which is to be updated on an annual basis, branch is expected to have at least a list of depositors as well as borrowers & defaulters with full details & a list of those households who have yet not been banking with the bank & reasons for not doing so, as an integral part of competitive business proposition.

Each of the rural & semi-urban branches may now need to initiate following action so as to comply with the policy-prescriptions of RBI & to yield expected results/output in rural areas.

1. 1. Within next three years each of the rural households [who have not been banking with the branch so far] would be brought within the banking fold.

2. 2. All rural households who are eligible for receiving Kisan Credit Card/General Purpose Credit Card but so far not received would be issued relevant card within one month.

3. 3. Those who have yet not settled their over- dues/are in arrears would be studied in detail case by case individually in order to initiate steps to settle over-dues in light of the existing procedure.

4. 4. 4. Those who have borrowed from informal sources[moneylenders in particular] would be studied in detail case by case individually in order to facilitate redemption of their debts with informal agencies in the light of existing guidelines & procedure.

5. 5. Those who have been in distress & affected by natural calamities or unforseen events would be studied in detail case by case in order to facilitate them to restructure their debt & repayment schedule/provide additional loan as per the existing guidelines.

6. 6. Those who have been regular in paying interest & loan installments on due dates would be considered to receive loan for any purpose viz, consumption, working capital, investment capital, renovation /construction of house, purchase of consumer durable goods etc in the light of the existing loan products available.

7. 7. 7. Those cases which are difficult to be decided at branch level or doubtful for consideration or branch does not recommend for consideration may need to be decided by higher/competent authority through following procedure in a transparent manner & client informed suitably in writing.

8. 8. In those cases where existing guidelines & procedure need to be relaxed in the larger interest of developing farm sector/ assisting small & marginal farmers, landless labourers, oral lessees, share croppers, tenant farmers, it should be favourably considered by the Board of the concerned bank.

9. 9. Systematic & planned efforts to widen & deepen credit in all villages under the Service Area Approach should enable banks to reach agricultural credit targets at least 16 to 17 per cent of net bank credit by end of March,2007.

10. 10. Branch manager in order to accomplish above task in a planned & cost-effective way should fruitfully utilize non-banking working day to visit village by giving advance information to villagers & discussing threadbare with them after advance preparation. Individual cases should be discussed primarily in the village & in detail in the branch after obtaining sufficient details of the matter. All cases discussed must be recorded in a bound register duly signed with date.

• While RBI has issued mandatory policy prescriptions to be complied with by banks, it is expected that Bank Management must have issued self-explanatory guidelines for its operational staff, inspection & training staff so as to ensure that rural/semi-urban branches are able to implement them without any difficulty/confusion. This is required to be followed up by need based training & post-training follow up.

• Periodically, preferably quarterly review & monitoring of the performance in this respect by the higher authorities, as envisaged by the policy makers, should be a continuing process to improve the effectiveness of the implementation process.

• Despite the fact that at block & district level forum of Block Level Bankers Committee & District Level Co-ordination Committee have been created to discuss & take decision on issues inhibiting the progress under credit based development projects/programs for which RBI has issued policy guidelines, these committees confine only to discuss Government sponsored programs just to achieve physical targets & not all programs as expected by the policy makers. Thus, it is necessary that either District Development Manager of National Bank or representative of RBI from State Head Quarter should be entrusted with the responsibility of reviewing & monitoring the performance in detail & pinpoint deficiencies & suggest time-bound action to improve the performance.

• Bank management, it is observed, pays inadequate attention to this vital area of concern in order to minimize operational cost of rural lending and staff at branch level is either inadequate [one man branch] or inexperienced/untrained who cannot respond to the requirements of rural banking &lending. It is necessary to put in place appropriate Rural Human Resources Management policy which can motivate staff to move/continue in rural areas & facilitate bank management to achieve expected results.

Enabling Environment

Government & banking system under the leadership of RBI & National Bank may need to create enabling environment, as briefly stated here below, which can facilitate rural branch staff to implement the policy guidelines successfully.

Farm Sector

• Farming activity at small farmer’s level should be diversified & made financially sustainable and bankable such that income realised is adequate to meet all expenses viz, cultivation, interest, risks, family’s livelihood. This is the responsibility of farm universities & Krishi Vigyan Kendras to evolve & transfer the proven & demonstrated technology among small farmers. Productivity of crops per unit area & time is very low, leave alone the quality of products, as compared to that of many countries. Research & application of biotechnology is one such area which needs serious attention.

• Agricultural insurance has a significant role in farming, in particular for small farmers. However, its applicability in any given situation is defined by the test as to whether it is the most cost-effective means of addressing a given risk. Experience of existing insurance operations in India needs to be evaluated & advantage of insurance expertise, record keeping and accounting systems and equipment in other countries should be taken.

• Financing Primary Agricultural Credit Societies by commercial/regional rural banks & establishing Farmers’ Service Societies by banks need to be reconsidered through modifying the concept & operational aspects in the light of new changes.

• High transaction cost may need to be significantly reduced through adoption of a series of measures viz, public investment in creating rural infrastructure particularly road, transport & communication facilities; broadening the scope of kisan credit card to cover all kinds of small farmer’s economic[farming & non-farming, short & long term] & social needs for credit including consumption & housing; credit linked with savings; loan products be adequately flexible, tailor-made to suit to different agro-ecological regions & socio-economic status of borrowers; credit needs & repayment based on house-hold’s cash flow & business plan and evaluated in terms of character & capacity of the borrower;

Specialised, trained & experienced loan officers posted at rural branches to evaluate credit proposals, guide clients & take decision within a maximum week’s time.

• Month-wise calendar focusing on flow of credit & receipt of interest & repayment to be prepared to ensure productive deployment of funds & expected returns.

• Government should invest in the development of water resources & efficient drainage system; sol & moisture conservation projects, create enabling environment & establish institutional infrastructure for easy availability of quality inputs & marketing facilities.

• To create essential basic rural infrastructure such as roads, electricity, communications, marketing infrastructure.

• From numerous expert reports and meeting documents, it is evident that agricultural credit expansion is hampered by farmers’ lack of knowledge about the availability and conditions of credit, and by the shortage of well trained bank staff, who have experience in dealing with small farmers and rural people. Training, therefore, should focus both on bank staff and farmers clients.

• Banks should accept staff training as an investment, forming part of overall manpower development. This needs to be reflected when recruiting staff bearing in mind that poor recruitment practices may result in poor recruits which cannot be rectified easily by training. Measures should also be taken to provide adequate incentives to bank staff who work in rural areas. Salary levels and fringe benefits, compensation for over time work, appointment and career perspectives need to be in line with similar employment in the urban sector in order to promote agricultural lending. Bank staff performance-based incentives should focus in particular on loan recovery and saving mobilization.

• Non-financial services such as information, training and extension can be provided by the State, by the private sector or by a combination of these. The problem is finding the right combination and identifying how to institutionalize these arrangements. Many drawbacks in the provision of support services can be traced to their high costs, to inefficiency and to non-involvement or non-commitment of the final beneficiaries, when they are provided directly by the public sector. The private sector strengths are in identifying the immediate needs of different clientele, in organizing the supply of services to meet the demand, and in managing effectively the financial transactions involved. However, there is still an important role for the public sector in providing a proper policy and legal environment within which private sector business activities can take place.

Micro-credit

• It is necessary to provide SHGs & their members need-based intensive & result-oriented training to enable them to acquire needed skills. There is need to institute a Training Program on the lines of Training Rural Youth for Self-Employment [TRYSEM] duly modified/refined and redesigned to suit to members of SHGs in different locations.

• Promotion, credit-linking &nurturing of SHGs may need to be integrated with social infrastructure viz, provision of health, sanitation, drinking water, education etc which have proved to create significantly direct & positive impact on the human life, more so of women & children.

• Panchayati Raj Institutions at all levels [village, block, district & State] must necessarily be involved under this program. While their main role should be to create enabling environment for the timely promotion, nurturing, credit-linkage & achieve sustainable growth, each one’s role, functions & responsibilities must be clearly & well defined so as to make them accountable as well as to ensure that members of SHGs benefit & integrate with the mainstream development of he country. A comprehensive Training Program for two days may need to be planned for them by National Institute of Rural Development in consultation with National Bank.

• Union Government & State Governments must provide adequate financial resources for this program to create required physical & social infrastructure and enabling environment that can promote, nurture, credit-link with banks & sustain growth & development of SHGs to pursue economic activities for increasing income of the members & reflect on their improved standard of living.

• Funds available under Micro-finance Foundation created at the level of National Bank & SIDBI should be utilized to create bare minimum but most essential infrastructure that can sustain the growth & development of SHGs particularly in hilly, tribal, desert & drought prone areas in the country. If necessary Rural Infrastructure Development Fund created at National Bank’s level as well as funds available with each Member of Parliament under the Local Area Development Scheme can also be utilized for this purpose.

• Every year monitoring-cum-concurrent evaluation as well as ex-post impact evaluation studies must be carried out on a regional basis by reputed institutions viz, National Institute of Bank Management, National Institute of Rural Development, Indian Institute of Management, Administrative Staff College of India, College of Agricultural Banking and the like in order to verify & confirm whether members of SHGs have derived the expected benefits under the program or simply the program is progressing in a routine manner. These knowledge-based institutes can provide new directions to the policy makers & implementers.

• National Bank in consultation with RBI & State Governments may consider necessary to organize on an annual basis a Seminar or Workshop in each State for a day to understand the existing & emerging problems inhibiting the sustainable growth & development of SHGs; issues that need policy decisions & directions.