Wednesday, December 17, 2014

Rural Cooperatives

Rural Cooperative Credit Structure beg for urgent reforms

Cooperatives with their spread are the best means for reaching the goals of financial inclusion and Jan-Dhan.
Their form and content needs change. Meaningful recommendations of Vaidyanathan Committee have been implemented more in breach. The States that received the reform package have breached on the MOUs and misspent the grant released and NABARD also did not put its heart in the monitoring of the grant assistance.
GOI should recall the grant assistance from all these states or should give them an year's time to re-engineer the rural cooperative credit structure to the promised health. 

The vast potential of cooperatives can be fully utilised only through de-bonding them from the politicians and vested interests and by ushering in legal and governance reforms. 

Friday, December 12, 2014

SBI should keep its eyes and ears open

Efficiency of banks does not go by the size of capital but by the performance and perception of the customer. SBI chairman, Arundhati Bhattacharya at the Delhi Economic Conclave sidelines has been arguing for freedom to decide on mergers and acquisitions be left to the banks themselves. Yes, it is the banks concerned and their boards that should take a responsible call on the issue. Has SBI taken stock of the issues that came up in its acquisition of the two of its Associates and the HR problems it had to handle and perhaps continuing to handle? Does it have a discussion forum where the customers and clients of the merged banks would also have a say? SBIs' ATMs are most times inefficient delivery points. They bask under the glory of their associate bank ATMs. Their attention to the customers has much to comment. Their corporate loans are the big ticket NPAs because of unperceived credit risks and poor due diligence. They are living by legacy.

Monday, November 10, 2014

Fast Tracking Financial inclusion

Jan-Dhan has been announced from the ramparts of Red Fort on August 15, 2014 and quickly made inroads into the field on no-holds barred approach the first ever, since the announcement of Financial Inclusion by Y. V. Reddy, the former Governor, RBI in 2005. The Committee on Financial Inclusion under the Chairmanship of Dr Rangarajan said: ‘Financial Inclusion is no longer an option, but a necessity.’ NABARD Report in 2008 gave a working definition later: “Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.” Had the Banks implemented the Differential Rate of Interest Scheme[1] (still in the RBI statutes) been implemented by the banks, monitored and regulated by the RBI, the Prime Minister Modi would not have had the good luck of taking this lame duck of financial inclusion under the new garb with such gusto. The credit limit for the Jan-Dhan scheme second dose is incidentally the same as the revised DRI limit of Rs.15,000 in 2010. What R.K. Hazare proposed in 1970s has been disposed by M.V. Nair in 2012.

Tuesday, August 19, 2014

Politician promises and Regulator disposes

Politician promises and Regulator disposes

There is an old adage that a farmer is born in debt, lives in debt and dies in debt. No farmer has liquidity when he wants cash in hand, for it lies either in land or stock. Farmer is today a part of the rule book, both with Governments and the financial institutions and the regulator.

AP and Telangana both the States, after formation, did not lose a minute in negotiating with the RBI the way forward to realising their hasty loan waiver promises. The States tried to bargain hard for restructuring the loans till they could find resources to fully credit the promised waiver amount into farmers’ loan accounts. The logic for waiver could be disputable but the request for restructuring on the sovereign guarantee has less reason to be faulted. This cannot be dubbed away as ’crony socialism’ – the meaning of which the creator of the phrase alone has much to explain.

The history of farm loan waivers – a sad one—politically motivated could have been resisted by the regulator even during the years 1990 and 2008. When the commercial banks were writing off loans of various other sectors but failed to respond to the farmers’ requests even amidst a do-or-die situation, the governments took law into their hands and claimed equity in debt treatment. In a political economy, howsoever puritan the economists are, the will of the politician prevails, particularly in democracy.
RBI after dilly-dallying for two months amidst hope and despair, decided to allow rescheduling of farm loans selectively in both the States.

Corporate Debt Restructuring for large corporate borrowers – the GMR, the GVK, LANCO, Deccan Chronicle, etc., earning profits and bidding for huge projects leaves one in doubt whether the greening banks’ books of accounts on a continuing basis unabashedly had tacit approval of the RBI. Why the farmers who face one calamity or the other year after year should be denied the loan restructuring facility even against the guarantee of State Governments on a different platter?

Existing guidelines on farm loan restructuring and rescheduling framed in the year 1974 (this author was a member of AFC-IBA Mission that framed these guidelines under the Chairmanship of P.F. Gutta) require fresh look by the regulator. The guidelines in those days did not distinguish one calamity from another. For example, cyclones would damage the soils with salinity while floods destroy the standing crops and even seed beds for that season. The effect of cyclone lasts for three to four years for normalcy to restore while in the year following floods due to silt accumulation, bumper crops would occur. Drought is a different ballgame altogether. Even the soil moisture would not be there for crops to be raised after continuous years of drought. Holocausts cause different types of losses to the crops. Further when those guidelines were framed there were no insurance mechanisms.

Crop insurance schemes even now are highly inadequate in content and delivery to take care of these varieties of losses, and require a comprehensive treatment. Post-harvest losses due to the natural calamities after their occurrence are more menacing than what the crop-cutting experiments indicate as crop prospects that determine what the district administration should declare under annewari.

The farmers also seek the whole marketing system to be revamped by modifying the provisions of the APMC Act 2005. Enabling the farmers to raise good crops in good season and creating capabilities to repay their obligations as respectable citizens is imperative. Financial inclusion for equity and financial discipline for stability are imperative for sustainable economic growth.

Due to the governments at the centre and states waiving partially the interest, in spite of budgetary announcements of crop loan targets, the crop loans of small and marginal farmers were mostly roll-overs while the incremental credit went in favour of large borrowers, contract farming, and urban farmers, if we were to go by the RBI published data. Therefore, in almost all the farmer-meets, there is a clamour from farmers that banks are weary of granting loans to them to the extent required for multiple activities and storage of crops and that the State Governments should enjoin upon the lending system to grant crop and other loans to them without delay and to the extent required at 4% interest rate suggested by Swaminathan Committee in 2007.

Even the most recent Round Table of farmers of both the States held under the joint auspices of FRSF and COKO (July 2014) favoured adequate and timely loans in preference to loan waivers. It is time to look at the RIDF that provided a window of opportunity to the commercial banks to make over their shortfall in priority sector – agriculture- lending targets and the Agricultural Debt Committee ( R. Radhakrishna: 2007)’s recommendation needs consideration.

Further, the senior citizens among small and marginal farmers and leaseholders having nothing to fall back upon in their old age, should be considered for old age pension of Rs.2000 per month.

May be it is time that the Parliament consider passing a law against any loan write-off announcement other than the loan provider with the sole exception of situations of natural calamities declared as such on the floor of the house. A special fund should take care of such write-off exercise with contribution from the State exchequer, Central Government, NABARD, and all the lending institutions in the proportion in which they lend to that particular sector.

In fine, I would suggest that the RBI would do well to examine the issues of farm lending portfolio more succinctly and create robust environment for safety, security and sustainability of farm credit. It is desirable to consider farm family as a unit for lending to enable cross-holding of risks from a variety of on-farm and off-farm activities that the farmers pursue so that in-built insurance mechanisms also come their way.

Monday, July 14, 2014

SMEs in Union Budget 2014-15 – Implementation Challenges

This path-breaking Union Budget providing discontinuing continuity on several fronts has concretized all the promises in the BJP manifesto unfolding the vision of the Modi Government. Its allocations reflect pragmatism in that some projects got funds for Detailed Project Reports while others of long term nature that can only make a beginning got symbolic outlays.

Manufacturing sector that is just showing signs of revival with its growth rate touching 4.7% in May 2014 reversing the negative trend of growth till the end of March 2014 got a shot in the arm. Of particular relevance is the attention paid to the MSME sector.

Sunday, June 15, 2014

Emerging Economies, Free Trade and Poverty

Poverty alleviation has been on the global agenda for the last seven and half decades. The World Bank, Asian Development Bank, United Nations, several developing nations and Developed Nations have made it as an important agenda. But the US, Japan, Germany and even China that registered consistent high growth during the last two decades could not be free of the poor. Asian Development Bank that has been spending billions on the agenda of poverty alleviation has poverty dancing right in front of its huge mansion in Manila. It could not show case even a small nation rid of poverty. Poverty can at best be reduced and not eliminated – this is one lesson that the economic history teaches us.

All the conferences on poverty alleviation throughout the World are held in Five Star or Seven Star Hotels and in Air-conditioned Conference Halls for hours and days together. Intellectuals gather to discuss their poverty and other’s poverty. Goals in one name or other and common agenda across the nations – e.g., Millennium Development Goals – are discussed and settled. Several researchers, bureaucrats, government and non-government organizations, donor institutions etc., decide to spend billions of dollars on the agenda. So much is the scope for employment provided by the poor across the world. Poor are the biggest employers in the world. Interest keeps renewing on poverty alleviation agenda – and now with focus on emerging economies and free trade. This paper is divided into two parts: part 1, dealing with free trade and emerging economies and Part 2, dealing with poverty with specific reference to India.

Risk Appetite: The pathway for profit.


This fiscal, the whole nation started off with a bang. Election euphoria ended with the grand announcement of single largest party in majority ascending to power after a gap of over two decades. A cultural transformation started off with Narendra Modi bowing before the Parliamentary stairs in reverence. Then there was historical swearing in of the Prime Minister, the first ever in independent India with all the invited SARC countries representing their nations for that ceremony. Minimum government and maximum governance, bringing down inflation, policy stability and clean government are all promises held out. All the Secretaries to the Government have been asked to make a presentation to the Prime Minister the status of various projects, in case of delays causes for the delays, when and how they are likely to be completed and for such closure what plan of action is with them and what supports are needed. To me, it looked as though a new tough CEO is assuming charge of GoI Inc. The risks at the moment would appear to have been addressed up front: first, a change in the culture; second, outlook and third, outspokenness and fourth, firm on implementation agenda. Objectives would be set; strategies would be discussed by the various ministries; tracking and tracing mechanism would be put in place; stress tests would be applied; and accountability and visibility with real time monitors and reports would follow eventually. The PMO website appeared within minutes of the swearing in ceremony beamed by all the TV channels. The whole world watched the biggest democracy in full strength determined to change the destiny of India into a formidable political and economic power. Why am I starting my paper with all this known stuff? The reason: a weak financial sector and strong economy can hardly co-exist; and the biggest deficits of all, the TRUST DEFICIT is fast eroding.

Sunday, June 1, 2014

The New Governments and the Loan Waiver

The New Governments and the Loan Waivers
B. Yerram Raju & M.L. Kanta Rao

Competitive populism compelled Rahul Gandhi while canvassing for the Congress party announced that he would write off up to Rs.2lakhs all individual farm loans. So did KCR, the CM-designate of the upcoming Telangana promised waiver of crop loans up to Rs.1lakh per farmer.

Seemandhra farmers are in a mood to rejoice: Voter bait won’t be voter wait – Chandrababu Naidu promises to sign the crop loan waiver for farmers as the first file as CM of Seemandhra (it would be however nice to christen the new State as Telugu Nadu). in Navyandhra and Nava Bharat where from now on people would be counting on the election promises of the winning parties, there will be no compromise on the promise. The NDA that met in Delhi on the eve of electing the leader of the BJP parliamentary party Viz., Narendra Modi, declared unequivocally that the poll promises would be realised and all the partners of NDA promised full support for the same.