Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Blogs/  RBI’s misplaced priorities?
BackBack

RBI’s misplaced priorities?

It's time to overhaul the entire priority sector concept and not fine-tune it, which RBI has done

RBI has redefined priority sector loan norms which stipulate that banks operating in India must offer 40% of all loans to farmers, small entrepreneurs and so-called weaker sections of society. Photo: BloombergPremium
RBI has redefined priority sector loan norms which stipulate that banks operating in India must offer 40% of all loans to farmers, small entrepreneurs and so-called weaker sections of society. Photo: Bloomberg

The Reserve Bank of India (RBI) has redefined priority sector loan norms which stipulate that banks operating in India must offer 40% of all loans to farmers, small entrepreneurs and so-called weaker sections of society. Almost half of these priority loans must flow to agriculture.

Two critical changes have been made. The old norms had stipulated that 13.5% of agriculture loans should be given to the farmers directly as crop loans and the rest, 4.5%, could be indirect loans to the farm sector, to allied industries such as food processing and fertilizer. Now, RBI has abolished the distinction between direct and indirect loans.

However, it has introduced a sub-target within the 18% share of agriculture. Banks must give 8% loans to small and marginal farmers. A small farmer is one who has a landholding of up to one hectare. In the case of a marginal farmer, the landholding is capped at two hectares.

Both are interesting changes. While removal of the restriction between direct and indirect loans will help banks achieve the target as they don’t necessarily have to channel the bulk of the loans to farmers alone, the sub-target for small and marginal farmers will ensure flow of money to where it is required the most. About 62% of Indian farmers, some 71 million, are marginal farmers. The share of small farmers is around 19% (21.6 million). Large farmers, with landholdings of more than 10 hectares, constitute only 1% of Indian farmers, but their collective landholding is 24 million hectares, against 28 million hectares held by marginal farmers. Those banks which have been giving loans to large and medium farmers (landing holding between four hectares and 10 hectares) will now be forced to look at marginal and small farmers. So, this has been a fine balancing act.

However, a closer look the implications of the changes tells a different story. The compliance cost for banks will go up as identification of marginal and small farmers is not an easy task. Land holding records are not being maintained the way they should be in the states. And by removing the distinction between direct and indirect exposure to agriculture loans, the new norms may end up encouraging banks to look for an easy way out—lend more to allied activities and not crop loans they are expected to offer. For all you know, we may actually see flow of money to agriculture coming down to 8% from 13.5% of overall priority loans.

Social infrastructure, such as school and healthcare facilities in smaller towns, and renewable energy have been included in the basket of priority loans. Banks lend to these projects if they find them commercially viable and will not change the approach because they are now part of priority loans. It’s time to overhaul the entire priority sector concept and not fine-tune it, which RBI has done. We should have many small finance banks operating in this ecosystem as priority banks, while all other banks could focus only on three segments—marginal and small farmers (8%), micro, small and medium enterprises (7.5%) and the so-called weaker sections of the society (10%). In effect, banks’ exposure to priority loans could come down to around 25% from the current level of 40%, but this decades-old route of channelling credit to the relevant sectors must be used in a meaningful way.

Tamal Bandyopadhyay, consulting editor of Mint, is adviser to Bandhan Financial Services Pvt. Ltd, India’s newest bank in the making. He is also the author of Sahara: The Untold Story and A Bank for the Buck.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 24 Apr 2015, 02:21 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App