Part II. Annual Statement on Developmental and
Regulatory Policies for the Year 2007-08
III. Credit Delivery Mechanism and Other Banking Services
147.It has been the endeavour of the Reserve Bank to improve the credit delivery mechanism and make available basic banking services to the wider sections of society and to ensure development of the rural-agrarian economy. Initiatives taken in this regard have been wide-ranging; improving credit flow to agriculture and other segments of priority sector, strengthening of the rural financial infrastructure and promoting financial inclusion, financial literacy and credit counselling.
(a)Delivery of Credit to Agriculture and Other Segments of Priority Sector
148.Domestic scheduled commercial banks, both in the public and private sectors, are required to formulate special agricultural credit plans (SACP) in order to achieve a distinct improvement in the flow of credit to agriculture. During 2006-07 (by end-September 2006), disbursement to agriculture by public sector banks (PSBs) and private sector banks under SACP aggregated Rs.58,887 crore and Rs.13,973 crore (provisional), respectively. Since the inception of the kisan credit card (KCC) scheme in 1998, the PSBs have issued 25.6 million KCCs (up to December 2006) covering limits aggregating Rs.88,279 crore. During 2006-07 (up to December 2006), 3.8 million KCCs were issued by PSBs covering limits aggregating Rs.19,781 crore. 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 RIDF XIII for rural roads under Bharat Nirman Programme with a corpus of Rs.4,000 crore. Cumulative sanctions and disbursements till February 2007 under various tranches of RIDF (I to XII) amounted to Rs.59,429 crore and Rs.35,121 crore, respectively.
(b)Priority Sector Lending: Refocus on
149.Guidelines on lending to the priority sector have been revised based on the Technical Paper of the Internal Working Group (Chairman: Shri C.S. Murthy). The focus of the revised guidelines is on sectors that impact large and weaker segments of population and are employment-intensive. The revision also seeks to rationalise the definitions related to priority sector lending. Based on a series of consultations with banks and other stakeholders:
•revised guidelines on lending to the priority sector are being issued shortly for implementation by all scheduled commercial banks.
(c)Simplification of the Procedures and Processes for Obtaining Agricultural Loans
150.The Working Group constituted in December 2006 to examine procedures and processes for agricultural loans (Chairman: Shri C. P. Swarnkar) for simplification of the procedures and processes for obtaining agricultural loans, especially by small and marginal farmers, has submitted its report. While the report has been taken up for detailed examination, it is proposed to:
•dispense with the requirement of "no due" certificate 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.
•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)Loans Extended against Gold and Silver Ornaments: Reduction of Risk Weight
151.Loans against gold and silver ornaments are commonly availed by the poorer sections of the society in both rural and urban areas. These loans entail relatively low risk as they are extended with adequate margins and the collateral (gold or silver) is easily marketable, particularly where the size of the loan is small. Such loans being in the nature of retail (personal) loans currently attract a risk weight of 125 per cent. It is now proposed:
•to reduce the risk weight on loans up to Rs.1 lakh against gold and silver ornaments to 50 per cent from the existing level of 125 per cent for all categories of banks.
(e)Revival of Rural Co-operative Credit Structure: Status
152.Based on the recommendations of the Task Force (Chairman: Prof.A.Vaidyanathan), Government of India has prepared a package for revival of the rural co-operative credit structure and has set up a National Implementing and Monitoring Committee (NIMC) to oversee implementation and progress of the revival package. Seventeen States and one Union Territory have accepted the Government of India package in principle. Of these, ten States have executed Memoranda of Understanding with the Government of India and the NABARD. Special Audits of all Primary Agricultural Credit Societies (PACS) have been completed and recommended by the respective District/State Level Implementation Committees in all districts of Rajasthan, five districts of Andhra Pradesh and four districts of Haryana. In Orissa, although the Special Audits have been completed in all the districts, they are yet to be recommended by the District Level Implementation Committee. Andhra Pradesh has passed the amendment to the State Co-operative Societies Act as required under the revival package, which is awaiting the consent of the Governor, State of Andhra Pradesh.
(f)Regional Rural Banks: Status and Further Action
153.Regional Rural Banks (RRBs) have a dominant presence in rural areas especially in backward and tribal districts. Being owned by the Central Government (50 per cent), the State Government (15 per cent) and sponsor banks (35 per cent), RRBs are expected to play a significant role in financing rural employment opportunities and meeting the need for financial services in their areas of operation. In order to strengthen and empower the RRBs, several steps taken in the recent period include expansion of the scope and flexibility of their operations, liberalisation and simplification of branch expansion and setting up of automatic teller machines (ATMs), and amalgamation of all RRBs in the State of the sponsor bank. As a result of mergers, the number of RRBs has fallen from 196 to 96. The deposits and advances of RRBs increased by 18.0 per cent and 22.8 per cent, respectively, in 2006 as compared to 12.1 per cent and 20.8 per cent in 2005. The credit-deposit ratio increased from 46.9 per cent in December 2003 to 60.2 per cent in December 2006. The number of loss-making RRBs has fallen from 40 in 2003 to 22 in 2006. The Union Budget, 2007-08 proposals, including phased recapitalisation of RRBs, will further strengthen the RRBs. Sponsor banks have been advised to take full responsibility for their RRBs and provide requisite support in areas of information technology (IT) and human resources (HR). State Governments, being major stakeholders, are expected to provide full support to the RRBs in meeting the objectives for which they were set up. As a measure of providing further business opportunities, it is proposed:
•to allow RRBs to take up corporate agency business, without risk participation, for distribution of all insurance products, including health insurance and animal insurance.
154.A Task Force (Chairman: Dr. K.G. Karmakar) on empowering the Boards of RRBs for operational efficiency was set up in September 2006. The Task Force has submitted its report which is under examination. The recommendations cover areas relating to HR, resource base of RRBs, investment avenues and the like.
(g)Relief Measures for Distressed Farmers: Status
155.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 DICGC Act for such farmers, submitted its final report in November 2006. Based on the recommendations of the Working Group, it is proposed:
•to introduce a credit guarantee scheme for distressed farmers. The details of the scheme will be placed in the public domain for comments/feedback by May 31, 2007.
(h)Technical Group for Review of Legislations
on Money Lending: Status
156.In the context of the finding of the AIl India Debt and Investment Survey (Fifty-Ninth Round) that the share of moneylenders in total dues of rural households increased from 17.5 per cent in 1991 to 29.6 per cent in 2002, the Reserve Bank constituted a Technical Group (Chairman: Shri S.C.Gupta) to review the efficacy of the existing legislative framework governing money lending, to examine the linkages, if any, between money lending activities and formal credit channels and make recommendations to the State Governments to improve the legal and enforcement machinery for money lending and similar activity, in the interest of rural households. The Group will submit its report by June 30, 2007.
(i)Credit to SME sector
157.The definition of small-scale industry and small business enterprises for purposes of inclusion in priority sector has been changed in alignment with the definition adopted in the Micro, Small and Medium Enterprises Development Act, 2006. Further, in order to improve credit delivery to SMEs:
•banks are urged to review their institutional arrangements for delivering credit to the SME sector, especially in identified clusters in various parts of the country, and to take measures to strengthen the expertise in and systems at branches located in or near such identified clusters with a view to providing adequate and timely credit.
158.Concerted initiatives have been taken by the Reserve Bank to provide smooth and efficient banking services to the general public at large. Efforts towards ‘financial inclusion’ include sensitising the banks to the banking and financial needs of the common person and ensuring access to basic banking facilities.
(i)Pilot Project for SLBCs for 100 per cent Financial Inclusion: Status and Further Action
159.State Level/Union Territory Level Bankers’ Committees (SLBC/UTLBC) convener banks in all States/Union Territories were advised to allocate villages to banks operating in their respective States/Union Territories for ensuring 100 per cent financial inclusion, with progress thereon monitored in the SLBC/UTLBC meetings. So far, SLBCs/UTLBCs have reported having achieved 100 per cent financial inclusion in the Union Territory of Puducherry and in some districts in Haryana, Himachal Pradesh, Karnataka, Kerala and Punjab. In this context, it is proposed:
•to undertake an evaluation of the progress made in these districts by an independent external agency to draw lessons for further action in this regard.
(ii)Working Group on Improvement of Banking Services in
Less Developed Regions/States: Status and Action
160.A number of Working Groups were set up in the recent period by the Reserve Bank to draw up action plans for improvement in banking services in some of the less developed States and regions. These States included Uttarakhand, Chhattisgarh, Bihar, Sikkim and those in the North-eastern region. The implementation of the recommendations of these Working Groups is being monitored by the SLBCs and the Regional Offices of the Reserve Bank. For the North-eastern region, there is a high-powered committee which is overseeing the implementation. In the light of the positive experience, it is proposed:
•to constitute a Working Group for the Union Territory (UT) of Lakshadweep to recommend measures for enhancing the outreach of banking services in the UT.
(iii)Services to Depositors and Small Borrowers in Rural
and Semi-Urban Areas: Status
161.The Annual Policy Statement of April 2005 proposed a survey with a view to making an assessment of customer satisfaction on credit delivery in rural areas by banks. Accordingly, 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 rural and semi-urban areas. The NCAER initiated the study in January 2006 and submitted a draft report in January 2007. The NCAER is expected to submit the final report by May 31, 2007.
(iv)Credit Counselling: Setting up of Centres on Pilot Basis
162.The Working Group (Chairman: Prof.S.S.Johl) constituted by the Reserve Bank to suggest measures for assisting distressed farmers had recommended that financial and livelihood counselling are important for increasing the viability of credit. Further, the Working Group constituted to examine procedures and processes for agricultural loans (Chairman: Shri C.P.Swarnkar) has also recommended that banks should actively consider opening of counselling centres, either individually or with pooled resources, for credit and technical counselling with a view to giving special thrust in the relatively under-developed regions. In the light of the recommendations of these two Groups, it is proposed:
•to advise State Level Bankers’ Committee convenor banks to set up, on a pilot basis, a financial literacy-cum-counselling centre in any one district, and based on the experience gained, to ask the concerned lead banks to set up such centres in other districts.
(v)IT-enabled Financial Inclusion
163.Introduction of ‘zero balance’ or ‘no frills’ accounts has enabled the common person to open bank accounts. However, providing banking facilities closer to the customer, especially in remote and unbanked areas, while keeping transaction costs low, remains a challenge. Recognising that IT-enabled services have the potential for effectively meeting this challenge, banks have initiated pilot projects utilising smart cards/mobile technology to increase their outreach. Biometric methods for uniquely identifying customers are also being increasingly adopted. Accordingly:
•banks are urged to scale up IT initiatives for financial inclusion speedily while ensuring that solutions are highly secure, amenable to audit, and follow widely-accepted open standards to ensure eventual inter-operability among the different systems.
(k)Micro-Finance: Evaluation Studies
(i)Bank-SHG Linkage Programme: Evaluation
164.The cumulative number of self-help groups (SHGs) linked to banks was 2.58 million with total bank credit extended to these SHGs at over Rs.14,479 crore (by end-February 2007). During the year 2006-07 (end-February 2007), as many as 346,000 new SHGs were linked to banks and the total bank credit to these SHGs was Rs.3,082 crore. It is proposed:
•to conduct an evaluation of the bank-SHG linkage programme through the regional offices of the Reserve Bank with a view to ascertaining the degree of transparency in maintaining the accounts by the SHGs and their adherence to well-accepted best practices.
(ii)Micro-finance Institutions: Findings of Study and Advisory
165.The Reserve Bank conducted a joint fact-finding study with a few major banks and, based on the findings, banks were advised to encourage micro-finance institutions (MFIs) assisted by them to focus on unbanked and underbanked areas, desist from multiple lending, engage in capacity building and empowerment of the groups and follow practices that maintain the cohesiveness of the groups.
166.The Reserve Bank has been sensitising banks to the objective of extending good quality banking services. Within the domain of necessary freedom to banks to choose the types of services to be offered to the customers and related cost, banks are encouraged to set for themselves a quantifiable benchmark for the quality of services.
(i)Banking Codes and Standards Board of India: Status
167.The Banking Codes and Standards Board of India (BCSBI), set up as a society in February 2006, released the Code of Bank’s Commitment to Customers (Code) in July 2006 setting out minimum standards for fair practices on various banking transactions for individual customer. Pursuant to the adoption of the Code, member banks have evolved policies on collection of dues and repossession of securities, cheque collection, compensation, and grievances redressal. A few banks have placed these documents in the public domain for improving customer awareness. The BCSBI has commenced its field visits to identify systemic gaps/deficiencies in banks in implementation of the Code and would facilitate rectification with a view to providing seamless services to individual customers.
(ii)Complaints about Excessive Interest Charged by Banks
168.The Reserve Bank and the Banking Ombudsmans’ offices have been receiving several complaints regarding levying of excessive interest rates and charges on certain loans and advances. Although interest rates have been deregulated, rates of interest beyond a certain level may be seen to be usurious and can neither be sustainable nor in conformity with the normal banking prudence.
•The boards of banks are, therefore, advised to lay down internal principles and procedures so that such usurious interest, including processing and other charges, are not charged.
(iii)Banking Ombudsman Scheme, 2006
169.Based on customer feedback, the Banking Ombudsman Scheme, 2006 is being amended to make it more customer-centric and sensitive to the present needs of the bank customer. Among other changes, it is proposed:
•to extend the appeal option under the Scheme, which is currently allowed only in respect of awards made by the Banking Ombudsman (BO), to decisions of the BO rejecting complaints relating to matters falling within the grounds of complaint specified under the Scheme.
170.In the area of currency management, the Reserve Bank endeavours to benchmark its systems and procedures against the best international practices to bring about better customer service with greater efficiency. In order to make it easier for members of the public to obtain the refund value in respect of mutilated notes, it is proposed:
•to modify the Reserve Bank of India Note (Refund) Rules (as amended up to 1980). The revised rules will come into effect after approval by the Government of India and after they are placed before the Parliament.
Click Here For Highlights of Annual Policy Statement for the Year 2007-08