New Delhi: June 18, 2017
Credit flows to agriculture under Priority Sector Lending-PSL display considerable seasonality not explained by cropping patterns. The Task Force on Credit Related Issues of Farmers, in its report submitted to the Ministry of Agriculture, Government of India, in 2010, observed that while month-wise credit disbursement patterns should have been in line with ground level requirements of Kharif (June, July, September) and Rabi (December, January) seasons, one-fourth of the disbursements instead happen in March, a month that is not critical to agriculture production.
Considering the fact that a bulk of the PSL lending is focussed in March every year because there is only a year-end target, the Nachiket Mor Committee recommends that the current PSL targets be applicable on the last reporting Friday of the last month of each quarter in exactly the same manner as it is currently applicable in the month of March, so as to ensure more timely and continuous credit flow into priority sectors. In order to ensure administrative ease, requirements such as investment into RIDF can continue to be levied on an annual basis and computed on the basis of the average of the quarterly requirements. This may at first glance appear to make it more difficult for banks to achieve their priority sector targets but on careful examination it is clear that this will in fact make it easier for them to build a strong and vibrant priority sector business:
1. From a demand side there is nothing particularly significant about the March quarter relative to the other quarters. Historically this was chosen as the date because in an environment where banking data was all managed without the use of computers, it was convenient since it was also the financial year-end. In a Core Banking System enabled banking environment it is now possible to track these targets, if necessary, on a daily basis. From a supply side, therefore, spreading out the achievement of these targets will allow lenders to more closely match demand throughout the year and build a lending division that is equally active throughout the year and not overly so only at the year-end.
2. Currently those banks that lend for short-term crops during the Kharif and Rabi seasons do not get any benefit of that lending for the priority sector target computation since the crop loans are, for the most part, already repaid by the end of March. This also in part accounts for the lack of an adequate supply response from the agricultural sector since credit is not made available in a timely manner. A more continuous lending programme would address this issue satisfactorily as well as ensure that credit risk is managed much better.
3. The need of the entire banking system to lend large amounts of credit during a single quarter end results in undue pressure on interest rates that can be charged and since the borrowers do not really need the money at that time it also increases the risk of diversion of funds and therefore of default.
4. The need to maintain a near continuous PSL portfolio outstanding rather than just at one point during the year will increase the focus of banks on investment credit, since, unlike crop loans, it has the property that it remains outstanding over a number of years.
The Nachiket Mor Committee is of the view that if the government does desire to provide relief in any form to the small farmer, it would be best carried out as a direct benefit transfer to the bank account of the farmer and not through the mechanism of either interest subvention or debt waiver. This would ensure that the banking system is able to price loans in a sustainable manner and also protect credit discipline amongst its borrowers. Adding a universal requirement to report all defaults to credit bureaus would ensure that the borrower also builds a strong interest in protecting his credit history. Canara Bank for example recently reported that using CIBIL data there were able to halve the NPA levels on their retail asset portfolio.
The Committee also recommends that in order to guard against large scale defaults resulting from catastrophic events, banks work closely with insurance companies to purchase bank-wide portfolio level insurance against events such as large scale rainfall failure on a regional or national basis, instead of having an expectation that relief would be provided from national or state budgets.
