The Crisis In The Agrarian Sector & Role Of Public Sector Banks

N M Sundaram

IN recent times the media has been coming out with stories on the conditions of the rural masses. There have been suicide deaths and heart wrenching exposures of penury and other privations caused to the different sections of the people - the farmers, weavers and others. There have been reports of children being sold - particularly girl children – by parents and men folk deserting families in search of livelihood. All this happened amidst the bizarre and surreal media blitz ‘India Shining’ resorted to by the insensitive NDA government that aimed at beguiling the people into voting them back to power once again. While most sections of the people were victims of this gross misrule by the NDA government, no section suffered more than the people in the fields and farms who are involved in the noble task of feeding the country.

The problems of the agricultural sector are manifold and complicated. We however, would restrict our focus for the present to availability of credit in this vital sector. 

RURAL CREDIT

Credit is mainly channelised through the banking system, though investments through public sector insurance entities, in particular by LIC are major sources for funding rural infrastructure and irrigation. This is apart from providing the needed insurance cover against a variety of contingencies.

Only around 20 per cent of the credit is available through co-operative societies, NABARD and public sector banks. For the rest, the farmers are forced to borrow from usurious moneylenders at extortionate rates, sometimes as high as 24 per cent or even more. Often it is not only the traditional money lender who operates; the traders and other rural rich have also taken to usury in a big way. For this sorry state of affairs, the public financial institutions cannot be faulted. They are faced with many constraints.

COOPERATIVE BANKS & NABARD

In the name of financial sector liberalisation certain serious impediments have been created in extending the needed credit to the agricultural sector. For one, the sorry state of the rural cooperatives that are politicised, are quite well known. They would give loans even to operators in the stock market rather than for agricultural operations. Most of the cooperative banks have been made to deviate from the assigned social role in the liberalised culture of banking.

The NABARD too is unable to play the due role due to woeful inadequacy of funding by the RBI. The RBI used to fund NABARD from out of its profits/resources, the main source being selling securities in the process of government borrowing. In the name of controlling fiscal deficit, the government has strangely reduced its borrowing from the RBI which is much cheaper but instead is resorting to commercial borrowing which is much more costly. These are all aberrations due to the questionable financial sector reforms.

PUBLIC SECTOR BANKS

The worst affected are public sector banks and directed lending through them. In the name of reforms they have been subjected to unhealthy competition from private and foreign banks. All social objectives of bank nationalisation have been jettisoned and profit delivery has been made the only criterion. So much so, many of the public sector banks have preferred to close down their rural branches in the name of non-viability. Where banks do exist, after the so called VRS, they are inadequately staffed. Banks have stopped recruiting officers and staff specialised in agriculture and rural sector.

The most glaring problem that has afflicted the public sector banks is the so called non-performing assets (NPAs) or bad debts. Particularly, after mechanical application of Basel I norms of 1988 on capital adequacy, many banks were forced to make provisioning and in the background of the government refusing to recapitalise them, resorted to disinvestment of shares to buttress capital. They even adopted the dubious means of writing off loans in order to give cosmetic touch to their NPA position. Even loans that could be recovered were not recovered. It is well known that the big corporates and rich borrowers defaulted more than 80 per cent of the loans taken without even paying interest. Thus as much as Rs1.3 lakh crore of NPA had accumulated. Most of these loans defaulted by these elements were written off (Rs 11,074 crore for 2003-04) or were squared off through the proceeds of disinvestment. In addition, as on March 31, 2004, a provision for writing off Rs 22,916 crore has been made against NPA. The result was bank lending to the rural sector – dried up throwing them into the clutches of usurers.

The small scale industry too has been similarly deprived of credit. This sad situation in the name of reforms has resulted despite the fact that loan recovery rate from the agricultural borrowers and small scale industries is the highest, as high as 80 to 95 per cent. There may be delay in payment of interest but they are known to repay unlike the big borrowers who despite having the resources dodge repayment. 

QUESTIONABLE REFORMS

In the name of reforms again, the big borrowers are seen to negotiate the interest rates and the banks having surfeit of funds (Rs 14 lakh crore of deposits) are yielding to give loans to them at ridiculously low rates. At the same time they are not allowed to reduce interest rates to weaker borrowers as this is considered risky!  For example, due to failure of monsoon or sharp fall in prices a farmer may default in paying the interest on the due date. If the interest remains unpaid for just three months, the loan starts sliding into a bad loan classification, attracting the provision of capital adequacy. So the tendency is not to give loans to these vulnerable sections of the people. The bank officers or staff cannot be faulted for this sorry state of affairs.

While farm loans and loans to small industries are hard to come by, there is other plethora of loan schemes for better off sections. For example, one sees advertisements offering personal loans without questions being asked and without collateral on mere production of salary/income certificate. Loans are offered liberally for purchase of consumer articles. A rich man can purchase a Mercedes or other luxury cars for 6 to 8 per cent interest. Loans are given for purchase of used cars. Housing loans are being hawked through advertisements by banks and builders. But for the life line of agriculture that feeds the people and small scale industry that provides the most employment, loans have been made costly  hard to get. All this has happened in the name of banking or financial sector reforms.

The central government has recently announced rural credit of as much as Rs 1,0,5000 crore. This is fine and would be welcomed by all. But if mere announcement of schemes would solve the problem one could feel happy that the government is indeed trying to do something to mitigate the hardship and help along. But how could this be put in practice unless the present method of classification of loans to weaker sections for assessing capital adequacy is revised realistically. Unless the reform dictated criteria in assessing risk weightage as dictated by Basel norms is jettisoned, vital credit to rural and other vulnerable and socially important sectors would be a pipedream. In a country like India, the prescription of ‘one size fits all’ formula of risk classification of bank credit would not be appropriate. It is neither sensible nor practical to ignore social priorities and compulsions in a poor and developing economy.

Secondly, the prescription that the government is providing for recapitalisation of public sector banks is further disinvestment of shares. If the disinvestment process is resorted to any further, the public sector banks would perforce be divested of all their social commitment and operate for profit and profit alone. Many public sector banks are dangerously coming close to that 51 per cent holding that is supposed to be the distinguishing bench mark. To further complicate matters, there is information that the Lahiri Committee report recommending giving exposure to FIIs in banks from 20 per cent to 40 per cent is awaiting implementation, with the government said to be favourably disposed.

BASEL II NORMS

In the meantime the Damocles Sword of Basel II capital adequacy norms are waiting to be put in place. While even the big banks of America and Europe are reticent of fulfilling the norms, the Indian government seems to be more than willing to carry them out despite inherent difficulties bordering on the impossible and inappropriateness for such rigid applicability in a developing country where credit to vulnerable sections remains a crucial social and economic priority.

Basel II norms (finalised by the Bank of International Settlements in Basel, Switzerland) are expected to get implemented according to Financial Stability Institute, Basel ‘by 100 countries in the next few years…’ and gradually by most of the others too by the year 2009 – at least 5000 banks controlling 75 per cent of banking assets coming under the jurisdiction of Basel Committee on Banking Supervision (BCBS) as well as 70 per cent of banking assets outside BCBS jurisdiction. The US has already decided to make it mandatory for ten of its biggest banks that control 70 per cent of the banking assets. The European Union is also expected to follow suit. No wonder these big banks jump at the prospect. Why not? The Basel II norms are so structured as to favour the big banks of the US and EU. Even the Japanese banks with its traditional practices might find the going tough. One of the offshoots of this would be a spate of mergers and acquisitions. This has already stared happening in the big league of the world banking system. As for the medium and small banks are concerned, Basel II provides the lethal dose; they would just perish without trace.

The government of India seems to have accepted all this meekly in its known zeal for financial sector reforms. What would then be the position of the biggest and the strongest of Indian Banks – the State Bank of India not to speak of other banks? Is the sudden thrust of the central government for merger of public sector banks a meek response to the emerging situation? The government that opposes merger of public sector general insurance companies has suddenly jumped at the idea of merger of banks. This requires to be pondered over.

PILLARS OF BASEL II

Basel II broadly speaking stands on three pillars or criterion for assessing risk weightage and capital adequacy. These may be briefly described as under:

Pillar 1: This could broadly be described as a rehash of the Basel I norms with modifications as regards alignment of capital adequacy determination more closely or realistically with the actual risk profile of each bank individually that could lead to economic loss. That is from a general application, the shift is to more specific assessment of the risk chart with appropriate classification for determining capital adequacy. This obviously would be done by assessing each risk individually.

Pillar 2: This emphasizes the exercise of close monitoring and supervision of the bank’s internal assessment mechanisms and their application in respect of overall risk undertaken. This is to ensure that the bank management exercises sound judgment in assessing risk so that possible losses are covered through provision of adequate capital to cover these risks. This would be tough ongoing process. This could be done through an ‘internal ratings based approach’ that would require classification of each asset according to risk and assessing the required capital therefor. This obviously is a cumbersome and onerous process requiring highly sophisticated levels of application of data collection and IT application. Alternatively, there could be a standardized model that would rely on assessment of external credit rating agencies who behind their veneer of objectivity and independent expert assessment would espouse the cause of international finance capital.

Pillar 3: This relates to adherence to market discipline, prudent management and transparency in public disclosure so as to ensure independent assessment of required capital being put in place in tune with the risk profile. This may appear simple enough. But there would inevitably be a compulsion to follow so called international standards that are attuned to suit the dominating instincts of the big American and European Banks.

In this entire scheme of things, where is the role for national governments who carry democratic mandate of the people? What is the role of the national central banks – in India’s case the Reserve Bank of India?

When Basel I norms were implemented there was a distinct slowing down in lending particularly to socially sensitive areas. There were also attempts at some dressing up of assets by moving them off the Balance Sheets. How would more stringent norms under Basel II fit in when extended social lending is of utmost priority as in India?

IMPOSSIBLE CONDITIONS

The Basel norms I as well as II are impractical. They seek to impose conditions unmindful of imperatives of national development of a developing country like India. They set at naught all determinations of national governments to prioritize social and economic development in the interests of its people virtually subverting the democratic mandate of the people. They impinge on sovereign functions of national governments and regulators. They put impossible conditions on national banking institutions robbing them of their functional autonomy and reducing them to mere appendages of alien interests. They make it well neigh impossible to extend and expand credit to vulnerable and nevertheless crucial areas of development like agriculture and small scale industry and for alleviating poverty and all other attendant malaise. This indeed is an instance of global finance capital on rampage.

The predicament of the public sector banks, the NABARD and the co-operative banks could well be understood. In the name of reforms, they have all been attuned to operate for profit alone unmindful of their social role. Those in authority who swear by the reforms must acknowledge this truth before pronouncing from the pulpit that they would direct these public institutions to give liberal credit without hassles to the farmers. They should refrain from indulging in gimmicks of visiting some bank branches and declaring that the bank officials have been brought in line and hereafter credit would flow unhindered as if it was not flowing so far because of the lack of such visits and exhortations to an unenthusiastic staff. This would lead to serious disaffections between the customers and the banks and its staff. This is dangerous.

We may as well take the example from Tamil Nadu, where the farmers in the Kaveri delta were subjected to serious privations because of lack of water in the river and failure of monsoon for three successive years. There were other constraints too. However when, some rains came and water started flowing in the Kaveri, farmers were still unable to start their sowing operation for the Kuruvai crop for want of money to buy other inputs! They complained that despite the state government claiming to have instructed State Cooperative Banks to grant agricultural loans without adjusting the dues in regard to the outstanding farm loans, they could receive no money since there were other loans too not categorized as farm loans and these were being adjusted. In the absence of clear guidelines neither the farmers could be helped nor could the blame fall on the bank officials. The same would obviously the position with regard to NABARD and public sector banks.

SHACKLES OF FOREIGN FINANCIAL INTERESTS

The old and the new capital adequacy norms would continue to hinder the government proclamation wanting to enhance credit to agriculture, small scale industry and other vulnerable but crucial sectors of the economy. The constraints and impositions emanating from external sources – from the World Bank, IMF, and international financial agencies through such devices as Basel norms and stringent, impractical, manipulative machinations of credit rating agencies, foreign consultancies and their kind  - must be thwarted firmly if the promises to the people as per the Common Minimum Programme (CMP) are to be implemented. Instead, it is strange that attempt is being made to induct the very same agencies like the World Bank, Asian Development Bank and foreign consultancies and so called ‘experts’ into the planning process by institutionalizing their presence in committees of the Planning Commission. This must be strongly opposed by all as the left parties have done. We must also compel implementation of the promises to different sections of the people given in the CMP.

CMP PROMISES

The present government has been catapulted to national governance on the back of tremendous expectations of the people who have suffered innumerable privations because of the divisive and anti-people policies of the NDA government that ruled earlier. They want the UPA government to remain in power for the full term of five years. However, it does not seem to be having the prudence, honesty and courage to help in the process. If it has, it must implement every one of the positive promises it has given to the people and not try to avoid them on the sly or brazenly.

Note: The article is based on a paper submitted by the author in the Media and Expert Consultation jointly organized by the National  Commission on Farmers and The Hindu Media Resource Centre for Ecotechnology and Sustainable Development at the M.S. Swaminathan Research Foundation, Chennai on September  4 , 2004.