Mid-Term Review of the Annual Policy Statement for 2007-08, RBI Credit Policy, Reserve Bank of India: Banknet India

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Part II. Mid-term Review of Annual Statement on Developmental and Regulatory Policies for the Year 2007-08

II. Credit Delivery Mechanisms and Other Banking Services

141. It has been the endeavour of the Reserve Bank to address the developmental needs of sectors of the economy that are disadvantaged in the credit market, especially agriculture and SMEs, by improving credit delivery mechanisms and making available basic banking services to the widest sections of the society without procedural hassles. Initiatives taken in this regard include refocus on employment-intensive sectors under priority sector lending; simplification of the procedures for obtaining agricultural loans; reduction of risk weight on loans extended against gold and silver; augmenting credit flow to distressed farmers; revival of the cooperative structure and regional rural banks (RRBs); development of new avenues of credit dispensation such as micro-finance institutions; and legislation for regulating money lending, deepening financial inclusion and improving customer services.

(a) Delivery of Credit to Agriculture and Other Segments of Priority Sector

142. Domestic scheduled commercial banks, both public and private, are required to formulate special agricultural credit plans (SACP) in order to achieve a distinct improvement in flow of credit to agriculture. During 2006-07, disbursements to agriculture by public sector banks (PSBs) and private sector banks under SACP aggregated Rs.1,22,443 crore and Rs.25,360 crore (provisional), respectively, as against the target of Rs.1,80,160 crore and Rs.40,656 crore. Since the inception of the kisan credit card (KCC) scheme in 1998, PSBs have issued 27.27 million KCCs covering an amount of Rs.1,00,226 crore. During 2007-08 (up to June 30), PSBs have issued 0.66 million KCCs covering limits aggregating Rs.5,514 crore (provisional). The Union Budget, 2007-08 has announced establishment of the Rural Infrastructure Development Fund (RIDF) XIII with the National Bank for Agriculture and Rural Development (NABARD) with a corpus of Rs.12,000 crore and a separate window under the RIDF XIII for rural roads under the Bharat Nirman Programme with a corpus of Rs.4,000 crore. Since the inception of the RIDF, the total allocation under the RIDF (I to XII) was of the order of Rs.64,000 crore. While cumulative sanctions to State Governments and the National Rural Roads Development Agency (NRRDA) under various tranches of the RIDF (I to XII) stood at Rs.61,312 crore and Rs.4,000 crore, respectively, the cumulative disbursements stood at Rs.38,934 crore (as on July 31, 2007). The disbursements under various tranches of RIDF during 2007-08 (up to July 31) amounted to Rs.1,374 crore. During 2006-07, various State Governments were sanctioned loans aggregating Rs.10,555 crore, including Rs.1,023 crore sanctioned to the distressed districts of four States viz., Andhra Pradesh, Kerala, Karnataka and Maharashtra.

(b) Priority Sector Lending: Revised Guidelines

143. Guidelines on lending to the priority sector were revised with effect from April 30, 2007 based on the Technical Paper of the Internal Working Group (Chairman: Shri C. S. Murthy) and the feedback received thereon from the Government of India, banks, financial institutions, NBFCs, associations of industries, media, public and the Indian Banks’ Association (IBA). The revised guidelines focus on ensuring adequate flow of bank credit to weaker segments of the population and to employment-intensive sectors of the economy. The broad categories that are covered under the priority sector include agriculture, small enterprises, retail trade, micro credit, education and housing, subject to certain limits. The revised guidelines also take into account the revised definition of small and micro enterprises envisaged in the Micro, Small and Medium Enterprises Development Act, 2006.

(c) Simplification of the Procedures and Processes for Agricultural Loans

144. The Working Group (Chairman: Shri C.P. Swarnkar) constituted by the Reserve Bank to examine the documentation, procedures and other requirements prescribed by banks in providing agricultural loans, submitted its report in April 2007 which was placed on the Reserve Bank’s website. On the basis of its recommendations, all SCBs (including RRBs) were advised to dispense with the requirement of submitting ‘Nil Dues’ Certificate (NDC) for small loans up to Rs.50,000 to small and marginal farmers, share-croppers and the like and, instead, obtain self-declaration from the borrower. Furthermore, in order to overcome the problem of producing identification/status documents, banks were advised to accept certificates provided by local administration/panchayati raj institutions regarding the cultivation of crops in case of loans to landless labourers, share-croppers and oral lessees.

(d) Agricultural Indebtedness: Constitution of Internal Working Group

145. The Committee on Agricultural Indebtedness (Chairman: Dr. R. Radhakrishna) constituted by the Government of India has submitted its report, which, inter alia, addresses issues relating to creation of credit absorption capacities, need for risk mitigation practices, introduction of cyclical credit system, dispute resolution mechanisms and setting up of a debt redemption fund. It is proposed to constitute an Internal Working Group to examine the Committee’s recommendations that are relevant to the banking system in general and the Reserve Bank, in particular. The Group is expected to have consultations with stakeholders and submit its report before December 31, 2007. The Working Group’s report will be placed in the public domain for feedback and further processing.

(e) Revival of Rural Co-operative Credit Structure: Status

146. Based on the recommendations of the Task Force on Revival of Rural Co-operative Credit Institutions (Chairman: Prof.A.Vaidyanathan) and in consultation with State Governments, the Government of India had approved a package for revival of the short-term rural cooperative credit structure. Thirteen States have executed Memoranda of Understanding (MoUs) with the Government of India and the NABARD as envisaged under the package. Implementation and monitoring of the revival package are being overseen by the National Implementing and Monitoring Committee (NIMC) set up by the Government of India. Furthermore, a study on the long-term cooperative credit structure was entrusted to the Task Force by the Government of India which submitted its report in August 2006. The Government is in the process of formulating a package of measures in consultation with State Governments.

(f) Regional Rural Banks: Status and Further Action

147. The Government of India initiated the process of State-level sponsor bank-wise amalgamation of RRBs in September 2005 in order to strengthen them. Consequent upon amalgamation of 147 RRBs into 46 new RRBs sponsored by 18 banks in 17 States, the total number of RRBs was reduced from 196 to 95.

148.In order to prepare RRBs to adopt appropriate technology and migrate to core banking solutions for better customer services, it is proposed:

• to constitute a Working Group with representatives from the Reserve Bank, the NABARD, sponsor banks and RRBs for preparing a road-map for migration to core banking solutions by RRBs.

149. The Internal Working Group on RRBs (Chairman: Shri A.V.Sardesai) had recommended that RRBs may be advised to maintain a minimum level of capital to risk-weighted assets ratio (CRAR) which would be progressively raised to the current level of CRAR as per the Basel I norms. At present, capital adequacy norms are not prescribed for RRBs and state/central cooperative banks. In order to further strengthen the capital structure of RRBs and state/central cooperative banks as also in the context of financial stability of the whole system, it is proposed that:

• RRBs and state/central cooperative banks should disclose the level of CRAR as on March 31, 2008 in their balance sheets.

• a road-map may be evolved for achieving the desired level of CRAR by these banks.

(g) Relief Measures for Distressed Farmers

150. The Working Group (Chairman: Prof.S.S.Johl) constituted by the Reserve Bank to suggest measures for assisting distressed farmers, including provision of financial counselling services and introduction of a specific Credit Guarantee Scheme under the Deposit Insurance and Credit Guaranee Corporation (DICGC) Act for such farmers, submitted its final report in November 2006. Based on the recommendations of the Working Group, an Agricultural Loans (Distressed Farmers) Guarantee Scheme, 2007 has been drafted and forwarded to the Government of India. The Scheme is being revised based on the Government’s comments.

(h) Technical Group for Review of Legislations on Money Lending

151. The Technical Group (Chairman: Shri S.C.Gupta) set up to review the efficacy of the existing legislative framework governing money lending and its enforcement machinery in different States and make recommendations to State Governments for improving the legal and enforcement framework in the interest of rural households, submitted its report in July 2007. The report has been forwarded to State Governments for consideration.

(i) Credit Flow to Micro, Small and Medium Enterprises Sector

152. Consequent upon announcement made in the Annual Policy Statement of April 2007, all State Level Bankers’ Committee (SLBC) convenor banks were advised on May 8, 2007 to review their institutional arrangements for delivering credit to the small and medium enterprises (SME) sector, especially in 388 clusters identified by the United Nations Industrial Development Organisation (UNIDO) spread over 21 states in various parts of the country.

(j) Promotion of Livelihood in the Unorganised Sector: Role of Financial System

153. The National Commission for Enterprises in the Unorganised Sector, under the Chairmanship of Dr. Arjun K.Sengupta has submitted to the Central Government a comprehensive report on ‘Conditions of Work and Promotion of Livelihood in the Unorganised Sector’. The report has suggested a package of measures for addressing some critical issues relating to farm and non-farm sectors. Some of the recommendations contained in the report relate to the Indian financial system. In order to study these recommendations and suggest the way forward, it is proposed:

• to constitute a Working Group to study the various recommendations of the report of the Sengupta Committee which are relevant to the financial system and to suggest an appropriate action plan for implementation of acceptable recommendations. The Group would submit its report within a month.

(k) Rehabilitation/Nursing of Potentially Viable Sick SME Units

154. The Standing Advisory Committee on Flow of Institutional Credit to the SME Sector observed in its eighth meeting held on January 16, 2007 that there has been considerable delay in rehabilitation/nursing of the potentially viable sick SME units due to the inability of promoters to bring in additional contribution for rehabilitation/nursing of the units. As suggested in the meeting, a Working Group has been constituted (Chairman: Dr.K.C. Chakrabarty) with representatives from banks and the Small Industries Development Bank of India (SIDBI) to examine the feasibility of bringing in additional capital through alternative routes such as equity participation and venture financing and suggest remedial measures for those potentially viable sick units which can be rehabilitated at the earliest. The Group is expected to submit its report by December 2007.

(l) Financial Inclusion

(i) Pilot Project for SLBCs for 100 per cent Financial Inclusion: Status and Further Action

155. So far, 160 districts have been identified for financial inclusion and 100 per cent financial inclusion has been achieved in the Union Territory of Puducherry and in 28 districts in eight States (Andhra Pradesh, Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Punjab and West Bengal). Notably, all districts of Himachal Pradesh have achieved financial inclusion. An evaluation of the progress made in achieving financial inclusion in these districts is being undertaken to draw lessons for further action in this regard.

(ii) Working Group on Improvement of Banking Services in Lakshadweep: Status

156. A Working Group (Chairman: Regional Director for Kerala and the Union Territory of Lakshadweep) with members from the Government of the Union Territory, the zonal heads of the NABARD, the SIDBI and the SLBC convenor bank has been constituted to undertake a study of banking services provided in the Union Territory of Lakshadweep. The Group is currently examining the various issues relating to improvement in banking services in the Union Territory.

(iii) Working Group on Improvement of Banking Services in Himachal Pradesh

157. A Working Group (Chairman: Regional Director for Punjab and Himachal Pradesh and the Union Territory of Chandigarh) has been constituted to review the role of banks and financial institutions in supporting initiatives taken by the State Government of Himachal Pradesh for promoting economic development and recommending measures for enhancing greater outreach/penetration of the banking system in the State. The Group has representatives from the State Government of Himachal Pradesh, the NABARD, the SIDBI and the SLBC convenor bank. The Group submitted its report in September 2007 which is under examination.

(iv) Working Group on Improvement of Banking Services in Jharkhand

158. With a view to improving banking facilities in certain less developed States/regions, the Reserve Bank had earlier constituted State-specific working groups to suggest necessary developmental initiatives. In pursuance of this policy, a working group for the State of Jharkhand has since been constituted to recommend measures to enhance the outreach of banking services in the State.

(v) Services to Depositors and Small Borrowers in Rural and Semi-Urban Areas: Status

159. As indicated in the Annual Policy Statement of April 2005, the National Council of Applied Economic Research (NCAER) was entrusted to carry out a study on the quality of services rendered by branches of commercial banks to their customers (both depositors and small borrowers) in the rural and semi-urban areas. The NCAER has since submitted its report which is being placed in the public domain.

(vi) Lead Bank Scheme

160. The Lead Bank Scheme, introduced in 1969, aimed at coordinating the activities of banks and other development agencies for achieving the overall objectives of enhancing the flow of bank finance to the priority sector and promoting banks’ role in overall development of the rural sector. With a focus on financial inclusion and recent developments in the banking sector, and in order to improve the Scheme’s effectiveness, it is proposed:

• to constitute a High Level Committee to review the Lead Bank Scheme.

(vii) Credit Counselling: Setting up of Financial Literacy-cum-Counselling Centres

161. In the light of the recommendations of the Working Group (Chairman: Prof. S. S. Johl) constituted for suggesting measures for assisting distressed farmers as also the Working Group (Chairman: Shri C. P. Swarnkar) constituted to examine procedures and processes for agricultural loans, SLBC convenor banks were advised to set up a financial literacy-cum-counselling centre in any one district on a pilot basis and extend it to all other districts in due course, based on the experience gained. Several banks have since taken initiatives in opening credit counselling centres in the country. In order to take this initiative forward it is proposed:

• to prepare a concept paper on the subject detailing the future course of action and place it on the Reserve Bank’s website for feedback.

(viii) Information and Communication Technology to Enhance Financial Inclusion

162. Widespread use of Information and Communication Technology (ICT) is expected to make 100 per cent financial inclusion a feasible goal in terms of convenience, delivery, cost effectiveness, reliability and security for costumers as well as providers of financial services. The initial cost in rolling out such technology-based services could hinder the path of financial inclusion. Furthermore, in certain remote areas, the unavailability of electricity supply may also require investment in solar power generating devices for use of ICT. It is, therefore, proposed:

• to provide financial assistance to RRBs for defraying a part of their initial cost in implementing ICT-based solutions, including installation of solar power generating devices for powering ICT equipment in remote and under-served areas.

(m) Micro-finance

163. The self help group (SHG)-Bank Linkage Programme has emerged as the major micro-finance programme in the country and is being implemented by commercial banks, RRBs and co-operative banks. By 2006-07, 29,24,973 SHGs were credit-linked to banks, with cumulative bank loans of Rs.18,047 crore.

(n) Customer Service in the Reserve Bank

164. It has been the endeavour of the Reserve Bank to improve the quality of its public services to the common person and reduce transaction costs as well as time, both for the Reserve Bank and the citizens/organisations. A Committee on Procedures and Performance Audit on Public Services (CPPAPS) (Chairman: Shri S.S. Tarapore) was set up in 2003 to undertake procedures and performance audit on public services and regulatory clearances in the Reserve Bank and to coordinate with the Committees on Customer Services set up by banks. It has now been proposed to constitute a Committee (Chairman: Shri Prabhakar Rao) to evaluate customer services rendered by the Reserve Bank. The Committee would evaluate the efforts for improving public services to common persons undertaken by the Reserve Bank since the adoption of the recommendations of the CPPAPS, review the existing policies and procedures and suggest improvement in the quality of services.

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