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Resource centre on India's rural distress
 
 

Private banks reluctant about rural lending -Dinesh Unnikrishnan
-Live Mint

Experts say private banks achieve lending obligations by buying out loans from non-banking entities

Most private banks in India have not been able to meet the needs of farmers although they are expanding their rural and semi-urban branch network. This is why the Reserve Bank of India (RBI) is insisting that at least one-fourth of the branches of the new banks that will be given a licence must be located in rural India.

In the past three years, even when RBI was increasingly forcing banks to spread services to the unbanked rural markets, there has not been much progress in money flow to rural customers. In fact, growth in lending to a significant chunk of the so-called priority sector, which includes economically weaker sections, has come down. Under priority sector norms, banks need to lend 40% of their loans to agriculture, education and other economically weaker sections.

The agriculture loan books of India’s large private lenders—ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd—three among the 10 private banks that were given licences in 1994-95, have not made any significant growth. Most of the rural lending continues to be done by state-run banks.

ICICI Bank’s rural loan book, in fact, declined by a little over `2,000 crore in the last three years to `19,789.2 crore in December 2012, whereas the farm loan book of HDFC Bank, the second largest private bank, was `4,622.83 crore in March 2012, compared with `3,263 crore in March 2009. Axis Bank’s farm loan book grew by `3,344 crore to`11,561 crore in three years to `11,561 crore in December 2012.

The nation’s largest lender, State Bank of India (SBI), more than doubled its farm loan book to `1.15 trillion in December 2012 from`54,678 crore in March 2009. Punjab National Bank (PNB), too, has almost doubled its farm exposure. PNB’s agricultural credit grew to`41,750 crore from `24,057 crore in three years.

The private banks have by and large stayed away from directly lending to small farmers and weaker sections in India’s far-flung areas. They achieve their priority lending obligations by buying out loans from non-banking institutions or by investing in rural infrastructure development fund (RIDF) of the National Bank for Agriculture and Rural Development (Nabard), experts said.

Since the launch of RIDF in 1995, Nabard has loaned around `1.2 trillion from RIDF to state governments. This simply means that commercial banks have not disbursed this amount to farmers and other economically weaker sections since 1995.

“When new generation private sector banks were given licences in 1992, none of them went to small places for at least the next 10 years. They did not even to go to their state headquarters of backward states and confined themselves to urban centres. They didn’t have their heart in this business,” said N.K. Thingalaya, former chairman and managing director of Syndicate Bank Ltd and an expert on rural banking.

RBI gave permits to 10 private banks in 1994-95 and another two in 2003-04.

“They didn’t have their heart in this business as they thought rural branches are less remunerative and employees hired in the urban centres were unwilling to serve in rural sectors. But for the regulatory compulsion and permission to avail new branch licences, no single bank would have gone to the rural areas,” Thingalaya said.

RBI, which released guidelines for the entry of new private banks on 22 February, wants new banks to have at least 25% of their branches in the rural areas and have a business plan that will “address how the bank proposes to achieve financial inclusion”.

Innovative financial inclusion plans of banking licence aspirants will be an important criterion to decide on granting new bank licences, RBI governor D. Subbarao said on 4 March at a conference in Delhi. Experts are sceptical on how RBI could promote financial inclusion through new banks, after failing to do so through the existing infrastructure of large private banks in the last two decades. “The new banks should be asked to operate mostly in these districts, where the banking services are not available yet adequately, instead of focusing on the already crowded urban markets,” Thingalaya said.

No priority for priority sector

RBI norms stipulate that 40% of bank loans should be made to the priority sector to increase the fund flow to segments such as agriculture, micro credit and economically weaker sections. Most private sector banks and some public sector banks have been seeking to meet this target indirectly by buying securitized portfolios of non-banking finance companies (NBFCs) that qualify for priority sector lending and investing in RIDF to meet the regulatory obligations. Total securitization deals in 2011-12 stood at `26,000 crore, of which those involving microfinance firms stood at around `3,000 crore, according to rating agency, Icra Ltd.
 
This has negated the benefit of compulsory priority sector lending reaching the intended borrowers, experts said.

Also, mounting bad loans from the priority sector loans have discouraged banks from going to the rural markets, said Vaibhav Agrawal, vice-president research, at Angel Broking Ltd. “Non-performing assets (NPAs) are disproportionately high in the priority sector for many banks. Banks ultimately consider the asset quality and rely more on RIDF investments and securitization (to meet the priority sector target). On lending side, rural business is a pain for banks even now,” Agrawal said.

“If you put the same effort in a rural market and an urban centre, the former is much less remunerative. The staff is not willing to go to rural branches and there is a shortage of infrastructure in these areas. How do you expect banks to do more direct lending with these constraints?” asked the chairman of a state-run bank. He did not want to be named.
 
Emails sent on Thursday to ICICI Bank and HDFC Bank seeking their experience on rural lending were not answered.

According to Agrawal, while about 40% of loans of the industry form the priority sector, the segment contributes about 60% of the NPAs. State Bank of India is the worst hit. In the December quarter, over 8% of SBI’s farm loan book turned bad, accounting for 18.5% of total NPAs. Indian banks’ priority sector lending had grown 12.84% in fiscal 2012, and 5.4% in the nine months of fiscal 2013 till December. Traditionally, banks rush to lend to this sector to achieve their target in the last quarter of any fiscal year. Banks’ lack of enthusiasm for farm loans, among other factors, has contributed to the shrinkage of agriculture’s share in the gross domestic product (GDP) of the nation, which fell to 16.75% in December 2012 from 37.5% in March 1980, according to official data. According to experts, RBI’s agenda to promote financial inclusion by using only the commercial banks and excluding NBFCs from the mainstream, will not help in spreading banking services to unbanked villages. Nearly 40% of India’s population does not have access to banking services.
 
“Banks have never really prioritized the so-called priority sectors willingly or approached them with a wholehearted mind, had it not been for the regulatory obligations.
 
The original idea of priority sector lending was making loans available to small and marginal farmers and landless labourers, village artisans at lower rate of interest,” Thingalaya said. “But most of the banks did not do direct lending to these farmers and economically weaker sections. This never actually served the purpose of priority sector lending to the extent it was required.”