Main index     India archive     Search

---

Gupta and Narasimham Committees’ Attack on Agricultural Credit

In April 1998, even as the reports of suicides of indebted peasants in Andhra Pradesh had crossed 250, and even as fresh tragedies were reported from Karnataka and Maharashtra, two important official committees submitted their recommendations on rural credit. Unruffled by the calamity sweeping Telangana and elsewhere, these committees called for doing away with targets for bank credit to agriculture. They also called for raising the interest rates on such agricultural loans as are made. The two reports are thus in line with the agenda set by the World Bank in 1990 itself: squeezing the meagre bank credit available to agriculture, the sector that employs two-thirds of India’s workforce.

Gupta committee’s attack on priority sector

It was on April 21 that the Reserve Bank’s R.V. Gupta Committee on Agricultural Credit presented its report. The committee had been appointed in December 1997 "to give an impetus to the flow of credit to this sector." Towards that end, "The main task of the committee was to suggest measures for improving the delivery systems and simplification of procedures for agricultural credit. The committee’s overall mandate was to ascertain the constraints faced by commercial banks in increasing the flow of credit, introducing new products and services and simplifying the procedures and methods of working with a view to enabling rural borrowers to access adequate and timely credit from the banking system."

However, the real purpose of the committee was not to give any such impetus to rural lending by the commercial banks, but the reverse. Its significant recommendations are as follows: (i) doing away with the target for agricultural lending (of 18 per cent of net bank lending); (ii) allowing commercial banks to freely fix rates of interest for loans of all amounts, even small ones (ie, doing away with subsidy on agricultural loans); (iii) doing away with compulsory posting of bank staff to rural centres. (RBI Bulletin, June 1998)

Silence about credit needs of agriculture

The arguments presented by the committee for the above are shallow.

First, it argues that the earlier target (that 18 per cent of net bank lending by public sector banks should go to agriculture) is no longer relevant, since the lendable funds of banks have been greatly increased over the last five years [1]. That is, it argues that the pie of net bank lending has increased so fast that setting aside 18 per cent of it for agriculture is no longer practicable: "banks have had to more than double their lending to agriculture during a period when agricultural production was growing at 2.1 per cent per annum". This conjures up improbable visions of bankers pressing loans on peasants unwilling to borrow.

Surely the first point that needed to be determined was: What are the credit needs (short-term and long-term) of agriculture? Are they being met by the banks? This question was simply not framed at all in the terms of reference of the committee; nor was it addressed by the committee; yet the committee blithely went on to recommend doing away with the earlier target for lending. The committee mentions the 2.1 per cent growth rate of agriculture to convince us that agriculture was not starved of credit — after all, it seems to suggest, when agriculture was growing so slowly, why did it need a rapid expansion in credit? But the reverse is in fact the case: for one of the reasons for the slow growth of agriculture is precisely because it is starved of reasonably priced credit [2], and is therefore unable to carry out productive investment.

Shrinking of bank finance to agriculture

Moreover, in this very period the share of loans to agriculture in net bank lending was declining, from 15.3 per cent in March 1991 to 11.7 per cent in March 1998 (Table 1). This is a dramatic reduction.

The committee has stooped to a bit of sleight of hand when comparing the "doubling" of bank finance to agriculture over five years with agriculture’s annual growth at "2.1 per cent" a year. Bank finance doubled in current rupees — that is, without accounting for inflation; whereas they have given the figure for agricultural growth in real terms, that is, after accounting for inflation. Let us take them both by the same measure: was bank lending to agriculture in real terms growing at even 2.1 per cent a year? No [3]. At 1980-81 prices, loans to agriculture on March 28, 1997 were just 9.1 per cent higher than on March 22, 1991 (Table 2) — whereas, had they grown at the compound growth rate of 2.1 per cent a year, they would have been 13.3 per cent higher in 1997 than they were in 1991.

At any rate, the figures for agricultural credit are getting murkier and murkier. The figure for "direct advances to agriculture" for March 1997 may also include some loans to corporate houses: As mentioned in Aspects no. 19 (p. 21), on 1/8/96 the RBI instructed banks that "all short-term advances to traditional plantations (ie, tea, coffee, rubber and spices) irrespective of the size of holdings would be treated as direct agricultural advances under the priority sector". The press pointed out that "This move will bring large corporates and multinational companies under the umbrella of priority sector lending." (Business Standard, 7/8/96)

Moreover, it is significant that the share of "indirect advances" in total agricultural advances grew sharply. These are loans made not directly to farmers but to allied activities. They were just 6.4 per cent of public sector banks’ outstanding loans to agriculture in June 1991, but by March 1997 they had become 16.7 per cent (Table 3). "Indirect advances" to agriculture can now be made towards the activity of financing and distributing agricultural inputs and machinery: that is, credit extended to traders can now be classified as "indirect agricultural credit". Had such indirect advances not grown so fast between 1991 and 1997, the figure for total agricultural advances would have actually fallen in real terms. (The game of expanding definitions goes on: On 28/5/97, "banks were advised that the finance extended to State Electricity Boards for Systems Improvement Scheme in the rural areas... was classified as `Indirect Finance to Agriculture’"!)

From all this, it is amply evident that, not only has the Gupta committee made no objective assessment of the credit needs of agriculture; it has not even noted the fact that direct credit to agriculture has fallen far behind the meagre growth of agricultural output — in other words, there has been a massive squeeze on agricultural lending.

Will hiking interest rates benefit small borrowers?

Secondly, let us take the Gupta committee’s argument that stipulating lower interest rates on small loans harms the small borrower, because bankers therefore avoid making such loans: "Timeliness and adequacy of credit are critical to increasing the credit flow to agriculture. Small loans involve higher transaction and administrative costs. As a result, managers tend to look for larger loans where interest rates are deregulated.... In effect, therefore, regulated rates of interest operate as a barrier to the sanction of small loans.... commercial banks should be free to fix the rates of interest for loans of all amounts."

No doubt the profit motive of bank managements runs counter to the stipulation of lower rates; but that is so with so many regulations, and that is why penalties exist for their violation. Once a stipulation is made and serious sanctions are applied against those who violate it, managers would have to obey it to one extent or another. The point is that bank managements have to be compelled to provide a certain target of loans to small borrowers, and at lower interest rates.

What is actually happening, however, is quite to the contrary. Every year since the beginning of the IMF-World Bank-dictated reforms, bank lending to agriculture has fallen woefully short of the target. By March 1996, public sector banks’ advances to agriculture were just 14.3 percentage of their net bank lending — whereas the target was 18 per cent [4]. Far from being penalised, banks have been congratulated and provided with ever-new avenues to get out of lending to agriculture. So the lack of motivation to provide small loans at low interest rates lies not only with bank managers, but in Government policy itself.

According to the committee, peasants are not so worried about the rate of interest they will pay, but about whether or not they will get enough credit, and on time; hence interest rates can be hiked as much as managers like. There are two problems with this argument. (i) The committee has not tried to show at what is the highest rate of interest at which it would still be viable for the peasant to borrow. It cannot justify higher rates by merely pointing to the fact that peasants pay much higher rates to moneylenders. Peasants may be paying high rates to usurers despite the fact that such rates leave them little saving, or even negative saving in some years; for they have no option. This is what was seen in the suicides of 1997-98. The rationale of providing loans at low interest rates to peasants is that they are poor; the activity in which they are engaged is uncertain, and the returns to the peasant are low; yet this activity must be supported, for it feeds the entire population and employs two-thirds of the workforce. Any proposal for increasing interest rates would have to demonstrate, with reference to the costs of cultivation and prices received by peasants, that agricultural development and living standards are not harmed by an increase in the interest rates on bank loans. The Gupta committee has not bothered to justify its proposal. (ii) If the committee were planning to increase interest rates somewhat, but vastly increase banks’ agricultural lending so as to eliminate dependence of peasants on moneylenders, its proposal would at least be worth discussing (although we would still not endorse it). For example, if a peasant household today borrows Rs 10,000 from a bank at a 15 per cent rate of interest, and Rs 40,000 from moneylenders at a 36 per cent rate of interest, it would be paying Rs 1500 plus Rs 14,400 = Rs 15,900 total interest payments. Thus the credit it gets from the bank, while insufficient, at least brings down its average rate of interest on its total loans. Whereas if the peasant household were able to borrow all Rs 50,000 from a bank at an 18 per cent rate of interest, and thus not have to borrow at all from moneylenders, it would be paying Rs 9,000 in all, thus substantially reducing its interest payments from the earlier scenario.

But, for the latter scenario, agricultural lending by banks would have to increase by many multiples — as we show elsewhere in this issue, total short-term agricultural credit extended by banks, cooperative societies and state governments comes to less than 15 per cent of the short-term credit requirements of peasants. Far from recommending any such tremendous expansion of bank credit to agriculture, the Gupta committee recommends reducing it, as we saw earlier. (In terms of our earlier example, the peasant household might wind up borrowing Rs 8,000 at 18 per cent, and Rs 42,000 at 36 per cent, in which case total interest payments would rise to Rs 16,560.) In other words, the Gupta committee’s clarion call is for loans to peasants to be made scarcer and more expensive.

Yet another Narasimham committee

M. Narasimham followed Gupta promptly with his report on April 22. Mr Narasimham is an old hand at committee reports. His last major opus was submitted in June 1991: the report of the Committee on the Financial System. Let us recall that famous report. It was widely pointed out at the time that Narasimham had done little more than reproduce the substance of a confidential World Bank report (India: Financial Sector Report: Consolidation of the Financial System, June 1990). For example, in relation to priority sector lending [5] the Bank report said: "In the near term: recategorize immediately commercial bank lending to larger borrowers among small-scale industrialists and farmers, thus reducing the priority sector lending target to about 20 per cent. Reduce further the priority sector lending target to 10 per cent in three years." Narasimham (1991) went one step further and recommended that in the near term the priority sector be redefined to include only weaker sections, and the credit target for this redefined priority sector should be fixed at just 10 per cent. The Bank report said that in the medium term the Government should "eliminate (the) priority sector lending target". Narasimham (1991) too proposed that priority sector lending "should be phased out", and said a review should be carried out at the end of three years to see if such a programme needed to be continued. The World Bank called for the reduction and medium-term elimination of concessional interest rates for the priority sector; and, to no one’s surprise, Narasimham (1991) recommended that "concessional interest rates should be phased out".

However, the Government did not take the direct, firing-squad approach suggested by the Bank and Narasimham, fearing peasant opposition to so sudden a withdrawal of bank credit. Instead, it chose to implement a "creeping Narasimham": giving informal, oral instructions to bank managements to pursue profit at the expense of the priority sector; deliberately failing to penalise banks for violating the targets; and expanding the definition of priority sector to allow a number of non-priority items to enter (examples of which we provided earlier). The result, as we have seen, was an effective cut in priority sector credit without any open declaration to that effect.

The latest Narasimham committee (1998) acknowledges the political compulsions faced by the Government, but persists in recommending that the priority sector be brought down to just 10 per cent: "The committee has noted the reasons why the Government could not accept the recommendation for reducing the scope of directed credit under priority sector from 40 per cent to 10 per cent. The committee recognises that the small and marginal farmers and the tiny sector of industry and small businesses have problems with regard to obtaining credit and some earmarking may be necessary for this sector. Under the present dispensation, within the priority sector 10 per cent of net bank credit is earmarked for lending to weaker sections. A major portion of this lending is on account of Government sponsored poverty alleviation and employment generation schemes. The committee recommends that given the special needs of this sector, the current practice may continue" — ie, just the 10 per cent to `weaker sections’. As for the rest, the committee opposes any "directive to meet specific quantitative targets".

The committee also recommends that the definition of "priority sector" be expanded yet further: "sectors like food processing and related service activities in agriculture, fisheries, poultry and dairying... should also be covered under the scope of priority sector lending."

For the entire priority sector, Narasimham (1998) repeats the demand of Narasimham (1991) that "the interest subsidy element in credit for the priority sector should be totally eliminated". In almost exactly the same words as the Gupta committee, Narasimham (1998) says that "it is the timely and adequate availability of credit rather than its cost which is material for the intended beneficiaries."

Who is responsible for bad loans by banks?

The rationale provided by the Narasimham committee for its attack on the priority sector rests crucially on what are called the "non-performing assets" (NPAs) of the public sector banks — that is, the bad debts of the banks, on which payments by the borrowers are in arrears to one extent or another. Narasimham lays the fault for the huge build-up of NPAs of the public sector banks at the door of the priority sector (1998): "Often, as international experience has shown, a high incidence of NPAs could be traced to policies of directed credit.... Social banking need not conflict with canons of sound banking but when banks are required by directive to meet specific quantitative targets, there is, as our own experience has shown, the danger of erosion of the quality of the loan portfolio."

It is not by coincidence that Narasimham and Gupta speak in chorus. Nor was it accidental that the December 1997 publication of the Reserve Bank of India, Report on Trend and Progress of Banking in India, 1996-97, stated (p. 13) that "The priority sector advances accounted for 47 per cent of the total NPAs and non-priority sector advances for the balance." This lone sentence is not backed up by a single table or any other detail in the entire 190-page report. The actual figure of NPAs arising from the priority sector is not even mentioned. Yet this sentence was picked up by the financial press with lightning speed. The Economic Times (8/12/97) declared: "The grouse of bankers that priority sector advances contribute to their non-performing assets (NPAs) is true, if one is to go by the figures released by the RBI’s Report on Trend and Progress of Banking in India". As pointed out by K.M. Shajahan ("Non-Performing Assets of Banks: Have They Really Declined? And on Whose Account?", Economic and Political Weekly, 21/3/98), the Report for 1996-97 actually "released" very few figures, leaving the entire picture very murky.

There is excessive eagerness to label the priority sector loans as the culprit. No doubt priority sector loans have a greater tendency to turn bad than non-priority, but this greater tendency accounts for only a small portion of the total NPAs. For if priority sector loans had only made up 41.8 per cent of NPAs (as they make up 41.8 per cent or so of public sector banks' advances), total NPAs would not have fallen dramatically.

As we go to press, we have received the latest Report on Trend and Progress of Banking in India, 1997-98, which gives more details of the NPAs arising from the priority and non-priority sectors. From this we can see that of the total NPAs of public sector banks in March 1998 (Rs 45,653 crore), Rs 21,184 crore arose from the priority sector, Rs 23,107 crore from the non-priority sector, and Rs 1,362 crore from the public sector. The break-up is 46.4 per cent, 50.6 per cent, and 3.0 per cent respectively.

Non-priority sector loans thus were Rs 23,107 crore plus Rs 1,362 crore, ie, Rs 24,469 crore. If non-priority sector advances were to constitute 58.2 per cent of the NPAs (since they were 58.2 per cent of total advances), then total NPAs would be Rs 42,043 crore -- that is, about Rs 3,610 crore less than they are at present. In other words, if the distribution of NPAs were proportionate to the distribution of bank credit, the total NPAs would only be slightly less than they in fact were. So the problem of NPAs as a whole can hardly be laid at the door of the priority sector.

While the documents give figures for the non-priority sector as a whole, there is no figure given by the RBI for the NPAs arising specifically from the corporate sector.The method of operation of the corporate sector is well-known in the banking industry. A corporate group borrows a sum from a bank in the name of one company, and systematically drains it out of that company. The company itself quickly turns ‘sick’, and the bank is unable to collect its payments, but must join the line of creditors and hapless workers who pursue the company fruitlessly through the courts and the Board for Industrial and Financial Reconstruction (BIFR). But this does not prevent the same corporate group from borrowing again in the name of another company, from even the same bank.

So uninterested are the Government and its banking industry in collecting their dues from the corporate sector that they have continued to pump funds into one after the other company belonging to groups that specialise in ‘sickness’. Even if an individual firm is blacklisted, the group as a whole is not.

One common practice of banks which want to avoid classifying a particular loan as an NPA is to carry out what is called `evergreening'. That is, banks give another loan to a company which is in danger of defaulting on its payments. With the fresh loan, the company can continue to make payments -- disguising the fact that the debt is in fact bad.This tends to understate the real scale of corporate sector bad debt.

The Government has no serious intention to investigate bad debts of the powerful. According to an executive order passed by the United Front government on the last day of 1996, the Central Bureau of Investigation is prevented from undertaking even a preliminary investigation into corruption on the part of senior officials of nationalised banks without the finance ministry's permission. "The Government will be hard put to counter the charge that the motive for this order is to shield the perpetrators of a scandal at the Indian Bank, which advanced Rs 1,500 crore in bad loans to relatives of certain political leaders", points out P. Bidwai (Times of India, 15/1/97). He also claims that "The top 15 business houses alone accounted for over a third" of total NPAs.

For example, let us take the Calcutta-based public sector Uco Bank. Its gross NPAs rose from Rs 339 crore to Rs 560 crore between fiscal years 1995 and 1997. From the list of defaulters prepared by the RBI as on March 31, 1997, it appears that ten defaulters account for nearly half the NPAs of Uco Bank. Prempter Cable Co Ltd is the largest defaulter, with dues of Rs 58.3 crore, followed by Bradbury Mills (Rs 28.3 crore), Bihar Sponge Iron Ltd (Rs 24.8 crore), Universal Paper Mills Ltd (Rs 20 crore), Shree Arduda Mills Ltd (Rs 15.9 crore), Shree Sitaram Mills Ltd (Rs 12.3 crore), Allahabad Development Authority (Rs 11.8 crore), Virgo Steels (Rs 11.4 crore), Raja Dhiraj Industries (Rs 11.3 crore), Aruna Mills (Rs 11 crore), and State Bank of Sikkim (Rs 10.7 crore).

One would have expected that the business newspapers, with their considerable database of companies and ample resources, would be interested in tracking down the bad debts of various companies and tracing their connections with the major industrial groups. One would have imagined that the two commissions on banking sector reforms, both headed by Mr Narasimham, would investigate the corporate sector bad debt and would call for blacklisting of groups containing wilful defaulters from the corporate sector. But none of this is the case. Their fire is concentrated solely on the priority sector.

Who accounts for priority sector NPAs?

This is not to suggest that the priority sector has not been used in order to siphon off money. It is well known that those who do not really require cheap credit, such as landlords, traders, and even corporate houses, avail of priority sector loans in one way or another. We can get an idea of this by looking at the size of the individual loans given as "agricultural credit". The first column of Table 4 gives the details of agricultural borrowal accounts of commercial banks for the year 1993-94, broken up by size of credit; the second column gives the total outstanding sum in each size category. The borrowal accounts with outstandings smaller than Rs 25,000 accounted for 96.5 per cent of all borrowal accounts. However, they accounted for only 53.2 per cent of the credit. The accounts smaller than Rs one lakh accounted for 98.9 per cent of all accounts; but they accounted for only 66.3 per cent of the credit. Whereas the accounts larger than Rs one lakh, just 1.1 per cent of all the accounts, managed to grab 33.7 per cent of the agricultural credit, or Rs 7710 crore. Even accounts with balances over Rs one crore accounted for Rs 2,029 crore.

[Note: 1 lakh = 100,000; 1 crore = 100 lakh]

It is also very likely that the NPAs in agricultural credit are concentrated in these large borrowers. The reason is that small borrowers generally need recurring doses of credit, and cannot afford to wilfully default (although they may be forced to do so under extreme circumstances); whereas big borrowers would rarely be in distress, and frequently would not even need to borrow, but would do so only for the purposes of hoarding or lending on further. It is well known that because of their political clout, they can afford to default.

This is borne out by a very revealing statistic related to non-performing assets given in the Report on Trend and Progress of Banking in India, 1995-96. At end-March 1996, total NPAs of public sector banks were Rs 39,584 crore; but NPAs arising from accounts with balance less than Rs 25,000 were just Rs 1,227 crore. That is, accounts with balances less than Rs 25,000 made up just 3.1 per cent of the NPAs and 0.5 per cent of the total advances by public sector banks. (This is for both agricultural and non-agricultural advances. Agriculture was the occupation of 42 per cent of all borrowers in the under-Rs 25,000 category. — Shajahan, ibid.)

Recall that in 1993-94 96.5 per cent of all agricultural borrowal accounts were of less than Rs 25,000. Small borrowal accounts, including those in agriculture, seem to have an excellent record of repayment compared to the larger categories. As Shajahan points out, such NPAs as have built up in the priority sector are clearly largely on account of large borrowers.

Significantly, the following issue of Report on Trend and Progress of Banking in India, for the year 1996-97, provides no figure for the NPAs arising from the under-Rs 25,000 category as of March 1997. It is the same issue that produces the mysterious "47 per cent" figure for NPAs from the priority sector. There is a concerted effort to release distorted statistics to damn priority sector lending while suppressing statistics showing that lending to small borrowers makes up only a tiny fraction of the bad debt.

To summarise: not only has agriculture been starved of credit, but a disproportionate share of such credit as has been available has been appropriated by large borrowers, who are likely to be landlords, traders, and other propertied sections. It is likely to be these sections who account for most of the NPAs arising from agricultural credit.

The phenomenon of NPAs in bank credit to agriculture points to the need for cutting off bank credit to the landlords, traders, and other propertied sections, and increasing it to peasants. Yet the figures of NPAs are being manipulated to serve precisely the opposite purpose: to cut bank credit to all of agriculture yet further, and leave peasants even more dependent on moneylenders, traders, and landlords for credit.

Table of Contents

Notes

1. The Government stipulates that banks maintain a certain portion of their funds in loans to the Government — Government securities; and another portion in cash. Both these stipulations block off a portion of lendable funds. But these "reserve requirements" have been step by step decreased over the last five years, from 63 per cent to 39 per cent.
   
2. Apart from the inherent nature of agriculture, which cannot grow as fast as industry.
   
3. In order to compare the real value of figures for two different years, we have converted them to the value they would have been in 1980-81 rupees.
   
4. Virtually all lending by commercial banks to agriculture is by the public sector banks: Indian private sector banks have low agricultural lending, and foreign banks are not expected to lend to agriculture.
   
5. "priority sector credit" or "directed credit": Since 1969, the Government has identified certain areas which it deems the "priority sector" for receiving bank credit, and which would not in the normal course get adequate or reasonably priced credit: agriculture, small-scale industry, weaker sections, and exports. The Government set targets stipulating the percentage of bank lending that must go to the priority sectors, and sub-targets for each sector. The target for agriculture officially remains at 18 per cent for public sector banks, although this target is largely ignored now.

---

Formatted by the Maoist Documentation Project

---