Resurrection of Rural Credit

Abstract

If the rural credit institutions find themselves in a moribund state today, this is largely attributable to the financial sector reforms introduced in the 1990s, as part of the process of liberalization and globalization of the Indian economy. In the milieu of the new banking culture fostered by reforms, lending to agriculture or priority sectors generally became unfashionable. The relative magnitude of the flow of credit to agriculture shrank and the interest rate regime which was designed to pamper the private corporate sector openly discriminated against agriculture. Even public sector banks (PSBs) merrily defaulted on the credit targets of 18 per cent of net bank credit to agriculture and 40 per cent of net bank credit to priority sectors. The Reserve Bank of India (RBI), which was obsessed with implementing the Basel norms as the main thrust of banking reforms, winked at the defaults. While the priority sector target has been attained during the last couple of years, the target for agriculture continues to remain unattained: lending to agriculture is around 15 per cent today, as compared to the target of 18 per cent of net bank credit. While highly rated corporate entities could raise money from banks or PSBs at interest rates as low as 6 or 7 per cent, the small farmer was required to pay a rate of 12 per cent. It was left to the Government of India to reduce the lending rate to small farmer to 8 per cent only in August 2003. RBI's neglect of agriculture and the rural sector generally was total during the 1990’s: it failed to arrest the deterioration of the health of all institutions involved in rural credit: PSBs, Cooperative credit institutions and Regional Rural Banks (RRBs) - all of these institutions showed high Non-performing Assets (NPAs).