Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2005-06
III. Credit Delivery Mechanisms
(a) Flow of Credit to Agriculture
82. The Union Budget has proposed to increase the flow of credit to agriculture by 30 per cent during the year 2005-06. It has been the Reserve Bank’s endeavour to enhance credit flow to agriculture by removing bottlenecks in credit delivery. In this direction, as indicated in the annual policy Statement of May 2004 and the mid-term Review of October 2004, most of the recommendations of the Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking System (Chairman: Prof. V.S. Vyas) have been implemented by RBI and NABARD. Other recommendations covering the target for direct and indirect lending for agriculture under priority sector lending, negotiable warehousing receipt system, setting up of agri-risk fund, computerisation of land records, permitting access to external commercial borrowing (ECB) and granting autonomy to NABARD are under examination of the Government. As at end-December 2004, public sector banks have issued 167.9 lakh Kisan Credit Cards (KCCs) with limits amounting to about Rs.46,000 crore. Cumulative sanctions and disbursements under various tranches of RIDF (RIDF I to X) amounted to about Rs.42,000 crore and Rs.24,000 crore, respectively, by February 2005. With a view to further increasing the flow of credit to agriculture, the following measures have been initiated:
• RBI has set up an Expert Group to formulate strategy for increasing investment in agriculture and the report is expected by end-May 2005.
• In order to make an assessment of customer satisfaction on credit delivery in rural areas by banks, it is proposed to conduct a survey with the help of an outside agency.
• Keeping in view the importance of post-harvest operations, it is proposed to increase the limit on loans to farmers through the produce marketing scheme from Rs.5 lakh to Rs.10 lakh under priority sector lending.
• There is a realisation amongst bankers that there are increasing business opportunities in financing agriculture, banks are, therefore, urged to continue their efforts to step up credit to agriculture.
83. The programme of linking self-help groups (SHGs) with the banking system has emerged as the major micro-finance programme in the country. Accordingly, the Union Budget has proposed to enhance the annual target of credit linkage to 2.5 lakh SHGs during 2005-06. As at March 2005, over 14 lakh SHGs were linked to banks and total flow of credit to these SHGs was over Rs.6,300 crore. NABARD and banks have set a target of linking additional 5.85 lakh SHGs to banks by end-March 2007. In order to give further fillip to micro-finance movement, the following measures have been initiated:
• The Reserve Bank has enabled non-governmental organisations (NGOs) engaged in micro-finance activities to access ECBs up to US $ 5 million during a financial year for permitted end-use, under automatic route, as an additional channel of resource mobilisation.
• As a follow-up of the Budget proposals, modalities for allowing banks to adopt the agency model by using the infrastructure of civil society organisations, rural kiosks and village knowledge centres for providing credit support to rural and farm sectors and appointment of micro-finance institutions (MFIs) as banking correspondents are being worked out.
(c) Credit Flow to Small Scale Industries
84. The small scale industries (SSI) sector plays a very important role in the development of the economy. While large industries have access to various sources of finance, the SSI sector has to primarily depend on finance from banks and other financial institutions. With a view to further smoothening the flow of credit, the following measures have been initiated:
• The Credit Information Bureau of India Ltd. (CIBIL) is working out a solution that would provide comprehensive credit reports on SSIs.
• The Reserve Bank is reviewing all its existing guidelines on financing small scale sector, debt restructuring, nursing of sick units, etc., with a view to rationalising, consolidating and liberalising them. Banks are urged to take the revised guidelines as indicative minimum requirement and the Boards of the banks are expected to formulate more liberal schemes as appropriate.
• Under a scheme to be drawn up by the RBI, banks will be encouraged to establish mechanisms for better co-ordination between their branches and branches of SIDBI which are located in 50 clusters that have been identified by the Ministry of Small Scale Industries, Government of India. Under the scheme of strategic alliance (i) the existing branches of SIDBI redesignated as "Small Enterprises Financial Centres" (SEFC) will take up co-financing of term loan requirements of SSI units along with the bank branches and the working capital requirements of these units will be met by the banks; (ii) the expertise of the SIDBI in appraisal of credit requirements of SSI units will be leveraged by the branches of commercial banks, by payment of a nominal fee; (iii) SIDBI will provide other expert services to help the banks in simplifying the application forms, documentation and disbursement procedures, etc.; and (iv) the working of the scheme may be monitored and modified to suit the local conditions by the State Level Bankers’ Committee (SLBC) and, depending on the experience, the coverage of the scheme may be extended to more clusters. The services of SEFCs will be available for tiny industrial units also.
(d) Credit Flow to Medium Enterprises
85. In view of the fast changing market conditions and increasing competitiveness, there is an urgent need to upgrade the technology of small scale industries and their graduation to medium enterprise sector. The Reserve Bank will explore modalities to meet their growing financial needs. A simplified debt restructuring and rehabilitation mechanism is also being considered for the sector.
(e) Restructuring and Development of Regional Rural Banks
86. The Regional Rural Banks (RRBs) are conceived as institutions that combine the local feel and familiarity with rural problems, which the co-operatives possess, and the degree of business organisation as well as the ability to mobilise deposits, which the commercial banks possess. In view of their importance as purveyors of rural credit, the Union Budget 2004-05 emphasised that the sponsor banks would be accountable for the performance of their RRBs.
87. As indicated in the mid-term Review of October 2004, sponsor banks are being encouraged to merge the RRBs sponsored by them state-wise. A few proposals in this regard are at various stages of consideration. While the sponsor banks were advised that the appointment of Chairmen of their RRBs should be approved by the Management Committees of their Boards, the Government was requested to ensure that independent and professionally qualified persons are nominated to the Boards of RRBs to make them more vibrant and proactive.
88. In order to reposition RRBs as an effective instrument of credit delivery in the Indian financial system, RBI is in the process of reviewing the performance of RRBs, exploring restructuring of RRBs through merger/ consolidation, changing of sponsor banks, reviewing minimum capital requirement and suggesting suitable measures for regulation, supervision and governance of RRBs.
(f) Priority Sector Lending
89. Prescriptions relating to priority sector lending have been modified from time to time, and generally the eligibility criteria have been enlarged to include several new areas. In December 2004, it was decided that only advances will be eligible, thus, beginning a phased withdrawal of eligibility of investments in bonds. There have been suggestions for a further review of the eligibility criteria and other related aspects.
90. One view is that lending to any infrastructure project should be made eligible for priority sector landing while making sub-targets fungible within the overall target. There is another view that enlargement of areas has resulted in loss of focus. It is also held that credit growth in housing, venture capital and infrastructure has been strong while it has been sluggish in agriculture and small industries. Further, it is argued that only sectors that impact large population, weaker sections and are employment-intensive such as agriculture, tiny and small industry should be eligible for priority sector. Since there are several issues that need to be considered in this regard, it is appropriate that these are debated and examined in depth.
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