Monday, December 26, 2011

Scripting the culture of change

The Chairman scripting the culture of change
It was 20th July 1972 sunny morning. In Visakhapatnam, no English daily would reach the morning readers to relax with a cup of coffee in the early hours of the day. The cool sea breeze on the long verandah was all that was available.

The previous day was tiresome as I spent the whole day till about 10p.m., in the village near Tallavalasa 30kms East of Visakhapatnam taking documents at the village for 90 crop loans I was to disburse, as Agent, Agricultural Development Branch of the SBI. Suddenly, the telephone rang uninterruptedly in the hall, as if it was a wake-up call. I picked up the phone. It was Development Manager (Agriculture) V.S on the line. First question: Did you see the paper today?’ No: was my reply. He said: ‘There is a box item in all the dailies on what you said in the village.’ I replied: Sir, I do not remember to have told anything to the press as I was only taking documents for the Agriculture Cash credit I programmed to disburse.’ The Box item reads: “SBI takes 400 odd signatures even for a hundred rupee loan. B. Yerram Raju, Agent , Agricultural Development Branch, SBI, Visakhapatnam confirms this, while disbursing crop loans for about 90 farmers in Tallavalasa village.” UNI. (I was told that all the dailies carried the item. Later in the month, all the magazines carried the item as a Box item.)
Then I said: I remember that the UNI Correspondent having come to know that the Bank is going to the farmer instead of the farmer coming to the village came to the village and sat through the whole day and must have sent the dispatch. I only confirmed his observation. Then he said: “dear raju: You know the Chairman Shri R.K. Talwar is here in Hyderabad. Yesterday, the Union Minister for Finance, Y.B. Chavan and the Chairman inaugurated the State Bank Staff College and the PR people had put in lot of efforts to put the picture in the front page and down below the photo this box item appeared.” Then I realized what the item caused.
Quickly followed a few more calls: from the Staff Superintendent, District Superintendent, the Regional Manager VNVP Rao – all calling, as if, for my explanation!! My RM said: The Chairman would like you to fly to Hyderabad today and see him by lunch hour.’ There was only one Dakota flight of Indian Airlines from Vizag. I immediately rushed to the Airport after managing the ticket.
I reached at 1p.m and went to the Local Head office to meet my RM and Development Manager. They accompanied me to the Chairman, who was about to go for lunch. “Oh, Yerram is here. Come; let us talk over lunch, he said. My shiver in the pants ceased. Then he asked the Development Manager: did you count the number of signatures on the cash credit document and Demand Promissory Note with the take-delivery letter that the farmer had to sign to get crop loan from us?” He said: “yes sir: it numbered to 427.” Then he asked me: how much time you took to complete the documentation for the 90 farmers? Sir, I and two of my field officers took about 13 hours in the village. We have to complete the disbursement before the cropping season ends in another week to ten days and we have 2000 crop loans to disburse in 30 adopted villages of the bank; even the appraisal form is nine pages , I said. What is the solution?
Sir, “Canara bank takes only a four-page simple document. When the law of the land is same for every bank, why should we take a cumbersome 9-page cash credit agreement? Each blank filled, addition, alteration, etc require the borrower’s signature and under group guarantee, the guarantors’ signatures or LTI. Each illiterate farmer’s thumb impression needs witness of two known persons. All this makes up for the number 427. We have to disburse tens of hundreds of loans in a number of villages ahead of the season.” The doyen of bankers understood the problem. He asked the Development Manager to go over to Bombay Central Office, the next day along with the solicitors from Madras. The team was to work out simple crop-loan documentation within a week’ time. I was to go along with the team to perfect it.
The result: simplified documentation and appraisal procedure for crop loans. This anecdote left an indelible impression on my career as a banker.

Sunday, December 25, 2011

A great legacy indeed

The legacy I enjoyed:
After a couple of years as Assistant General Manager of a Textile Mills immediately following my post-graduation in Economics made me sterner stuff having handled a strike by a 450-labour and later the management declaring a lock-out for 24 days. My fatehr desired that I should become a Probationary Officer in either RBI or SBI or get into civil service. I could fulfil his wish preferring SBI PO to IPS where also I got selection. The grooming I got from my dad made me hold my head high.

My father, a banker who joined the Imperial Bank of India (IBI) in 1936, had his grooming at the altar of efficiency in banking and finance. He was an upright cashier and the most loving and yet most feared Head Cashier of the Bank in the composite Madras Circle of the IBI. I used to carry coffee flask to the main branch of Visakhapatnam when I was seven years at 12noon – his coffee hour for the entire 94-year life he lead. One day, he asked me to wait and there was lot of anxiety in his face. He went to the Agent to report that he gave one section in excess to the captain of a ship and the ship was about to sail in the evening at 4p.m. The Agent telephoned to the Port Authorities to allow this cashier, i.e., my father to reach the captain. He gave his car to go to the port. My father could go to the captain. He seemed to have told the captain of the excess payment. The Captain said: “I did not count: young man, for a IBI cashier never faults. He pulled the cash cover and asked my father to recount and take if the amount was alright. My father recounted and showed to him the excess one-rupee note section (Rs. One hundred in all – and this was a big sum for a cashier whose monthly salary was just Rs.36 with a biennial increment of four annas (quarter of a rupee). That was the image of a bank cashier in that by-gone era. My father was later cautioned by the Agent but the Captain insisted on the British Agent R.L. Wishart to reward the young cashier that accelerated his increment by an year!!
He was posted as Official-in-charge of a Pay office at Ramachandrapuram in East Godavari District and was given ten days time to take over the charge of his official position. During the take-over period, the person-in-charge was supposed to verify all the stocks and gold ornaments pledged to the bank to confirm that the drawing power was well within the drawing power. The predecessor was known to be lax in all the official matters. My father was examining the stocks – and they were supposed to be oil drums. He took a wooden stick and started beating all the drums and asked the owners to break open the seals. Initially, there would appear to be lot of resistance and later there were veiled threats. Unrelenting, he insisted and one drum opened, revealed that it was water and not oil. He lost no time in advising both the branch controlling the pay office and the Madras Local Head Office while serving a notice on the borrower firm to make good the entire advance within 24hours. The Agent who had a hand in perpetrating this fraud became angry at his reporting to Head Office but could not find fault in calling up the advance. The event led to the suspension of the predecessor. The Agent, however, transferred my father even before the complete take over to another pay office. This incident was narrated to me when I was undergoing training as probationary officer. Another lesson I learnt from him was the way I should do physical inspection of stocks of wooden logs and iron and steel. The length, tensile strength of the steel measured in weight and the quality of wooden logs – measurement and volume etc.
At another branch, he noticed that a cashier working at the counter, for whose omissions, commissions and intromissions’ he is responsible by virtue of the Agreement that the Head Cashier had with the Bank, was opening the clipped notes at the cash verification table. He lost no time in asking him to quit the table by dislodging him from the work. He recommended that cashier’s suspension and the Bank had to conduct the enquiry and on admission of the guilt, the cashier was let off with a cut in increment. He used to say that a cashier who cannot see the cash in the safe or counter at work as pebbles or insects, that person was unfit for cashier’s job. Such rigidities have no place today. But the legacy he left and the lessons he taught me held me in good stead during my nearly three-decade career in the State Bank of India – the legatee of IBI. I had the unique opportunity of serving his retirement letter as I was posted to the branch as Branch Manager where he was serving as sub-accountant (both son and father cannot serve in the same branch and his posting to another local branch was also issued but he preferred to retire having only an year left for his actual retirement in 1974). The Regional Manager processed his application for retirement during my one-month taking over period. On the day of my assuming charge, he retired from the same branch. The most fortunate legacy, I thought worthy of recall in these days when corruption and bribery are being fought in streets.

Monday, December 19, 2011

Future need not be rosy but not reddish either

Markets are tizzy at the moment. The economy looks down the drain in the backdrop of global debt crisis; falling rupee; rising inflation; political paralysis and less than estimated GDP growth. But what holds promise is the concern of all and the anxiety to resurrect the sagging economy. Finance Minister has a tough task ahead in the Budget 2012-13, with just an year to go for the General Elections. The fiscal deficit would hardly find space for further doll-outs. The ray of hope is that the US economy promises a revival. The bail-out package to Europe also lends some credence to keep the balance swinging in favour of arresting unrest in the economy. However, the domestic undoing in the last two years unfolding scams after scams needs tackling firmly and this is where the infirmity lies. Markets are not going to behave worse if the FM makes bold to increase the Share transaction tax to at least one percent. Second, the farmers must be provided input subsidies of a larger scale than now but with laid out crop planning regionally acceptable; investmetns in drought proofing the economy; and finding resources for merti goods like education and health at double the rates prevailing now. The year ahead may not be rosy but need not be reddish either.

Tuesday, December 13, 2011

The falling rupee - domestic policy paralysis or global clues?

Let us look at the falling rupee in the context of inflation. Pare it with the value of rupee - you will notice that the fall is fatal. There is no dispute that there is decision deficit along with the rising fiscal deficit. We have to rise above petty politics and create conditions conducive for attracting investors. To blame it all on FDI - retail is looking the problem through a coloured glass. There is decline in IIP on a continuing scale and this is in the backdrop of unceertain future in the farm sector - what with the rising rate of suicides of farmers and crop holiday in one of the leading agrarian states in the country. Let me now take the point of Euro crisis and its impact on Indian economy. Despite our not so strong exports to Euro Zone, the refusal or absolute lack of resolve to tackle fiscal indiscipline by the Euro Zone with London,Berlin and Paris ganging up against any reasonable support clearly direct a worse recession in the next six to twelve months. This is bound to adversely impact, notwithstanding the stable domestic savings and investment ratios thus far. While it would be injudicious to provide the sort of stimulus that the Government announced in 2008, the Government should create conditions for a steady flow of investments in infrastructure sector. The country has blurred in continuing to support thermal power in the context of unsupporting coal reserves and has done little to create a power grid of varietal sources of energy. Energy risk management speaks volumes of the failure of government economic pundits. This has scope for drastic improvement and this does not depend upon global recession. It is time that the Government wakes up to realities. Whatever the RBI could do has been done. It is for Government to do what it has to do to contain inflation and brace up for better governance, both political and economic.

Being a Co-author

Having been a co-author for five of my fourteen books in my four and half decades of teaching, training and learning career, introspecting into such experience unfolded many lessons worthy to share. My first co-authored book on rural banking was with my boss, where I wrote most of the text and the boss gave a second reading and scripted five chapters himself. He being the boss became the first author and highly competent and understanding as he was, there was no regret. He took the lead in its propagation. The second was a co-edited book with a trainee-bureaucrat on a theme we settled upon. We invited articles from distinguished writers on the subject; we edited them; the first author took the lead in extending invitations to writers; he wrote the introduction to the book and I suggested that he should be the first author. Then came the third co-edited publication: it was the proceedings of a Seminar on the subject on VISION 2020 in a State Agriculture Economy. The co-author was a reputed Agriculture Scientist and a retired Vice-Chancellor. Though most of the work relating to conduct of the seminar and compilation of articles presented at the seminar was done by me, my highest regard for the person of eminence who chaired the seminar and who went through the script for arranging them in an order appealing to the reader, resulted in giving him the rightful first place among the co-authors. The fourth was again the summary of the proceedings and presentations of a Seminar on Corporate Governance organized by me and my co-author. The co-author was the person who suggested for publication of proceedings and took lead in tying up with the publisher of repute. Naturally, the first among us was he. The fifth publication was on Small Enterprises, a subject close to my heart. I requested an old colleague of mine, who is an expert on International Banking, to script a chapter on international markets. He did it in good time. Though he initially did not agree to be co-author, I invited him to be on rolls and he took the second place.
The latest one is a cut different. The co-author and I got in touch with each other through the mediation of his Professor who enrolled him for Ph.D. His dissertation was reviewed by me. The request to be co-author for a different kind of research effort took me close to him. The themes were exchanged; the script went up and down; there were additions of experiences; there was review and re-review and it was an year and half work on the net and a year-and half of research by the co-author with his team of research. The whole concept and thought process took shape at the research desk. It was only when the first draft got ready, both of us happened to see each other to run through the script together. It was the work behind the book; the passion of the co-author in the whole script; his zeal for being an author of global repute in the very first script – all together, put him as the first author.
The pride and prejudice of the first authorship and the humility of the second authorship in the journey of experiential learning are worthy to share, I thought.

Friday, December 2, 2011

FDI in Retail: Whose interests would it serve?

Twists in Indian Retail Trade:
In his inimitable style, Dr Debroy exposed the hollowness of the much touted latest reform agenda – the FDI in Retailin the edit piece of Economic Times on 2nd Dec 2011. The essence of it all is that the farmers, mostly the small, marginal, and the tenant farmers as also the Kirana retailers are bound to loose out. The loosing tenants are driven to suicides. The large farmers are out of farming mostly and settled in real estate or tourism or hospitality industry that is more remunerative but are not out of farms. They rented out to the smaller cousins. The APMC Act and its rules deserve all the blame. The Agriculture market Yards (AMY), most of which own high value assets and turn out good cess to the state governments invested too little in taking markets closer to agricultural production. They could have utilized the ICT to establish a well-endowed storage cum market yard. In the hinterland of the AMY, farmers could have been given a smart card as the first step. They could have set up the spot markets after constructing four-layered storage godowns: ground floor for seeds; second floor for fertilizers and other inputs for farming; third floor for outputs; and the last floor, cold storage connected through a conveyor belt system with all bins properly marked. The farmer who enters the market in such a system would have swiped the card at the entrance; unloaded his produce with laden weight of the produce recorded; sorted and graded the produce and at each of these points the weight and price duly recorded. If he were to arrive late during the day, he could just unload the produce and proceed to the dormitory on the first floor of the service building of AMY. The whole produce so delivered would get into the spot market when the farmer would receive 70-80 percent of the value of the produce so delivered after paying up the service charges on-line. This would eliminate the stranglehold of the kutcha adityars or the exploitative intermediaries. Such markets to be set up require INR 20-30crores and should not be difficult to be found. The farmer, irrespective of the size of his holding, would have gained. It is important in such situation to get rid of the CACP. The spot market can eventually be linked with the futures when real price discovery would have taken place to the advantage of the farmer. The food retail markets would have the prospect of sustainable gains and the consumer also would have had the distinct advantage of the direct purchase and sale. All said and done, the FDI Retail would have no more than ten percent of its space for the food products.

Saturday, October 29, 2011

Second Quarter Monetary Policy hints stability

Monetary Policy for Second Quarter 2011 unleashes the anxieties and concerns over growth when it pegged the current year’s growth at 7.6% in the backdrop of continuing inflationary pressures. The Governor yet another time raised the repo rate by 25 basis points in the fond hope that it would hold the price line albeit at the current levels. Reining in inflation is more important than growth, no doubt. But if the supply factors are contributing to the rising inflation as is the case now, it will be a futile hike. It is also the currency supply, particularly the higher denominations, that has to be pegged.

Yet another measure to give relief from inflation is the deregulation of interest rates on savings bank accounts. Interest is a future income and through this measure, small savers are enabled to get a positive real rate of return on their savings at a future date. It is hoped that the banks would come up with attractive small savings products outside the bond of Rs.1lakh. Banks like the SBI, HDFC Bank etc which have CASA deposits hovering above 46 percent of their total deposits, could find some difficulty initially but over a medium term their ALCO would be able to grapple with the situation and offer competing small savings combo products to their account holders as they cannot risk migration of accounts in a volatile inflation-driven economy.

The Governor threw a veiled threat telling that inflation may not be range bound once the commodity and oil market rate fluctuations are passed on to the consumers. He foresees that the administered rates in these areas are likely to give way to market-determined rates.

Sunday, September 25, 2011

The Pro-poor farmer credit on the wane

M.S. Swaminathan, the architect of the National Policy for Farmers, and the Expert Group on Agricultural Indebtedness forcefully argued in 2007 for a change in the in the mindset of Institutional lenders. Balancing equity with discipline has been a formidable issue in farm credit defying proper response from the institutional credit agencies and the government alike.

Forty percent of total credit has been earmarked for priority sector and out of this target, 45 percent has to go to agriculture. At least 50 percent of direct farm credit was to go to small and marginal farmers (SMF). Number of accounts does not mean number of farmers as one farmer may have more than one account both in long term and short term credit. RBI statistics do not reveal how many farmers do have credit in their hands. It is appropriate to classify all the farmers in the size-holding of below 5acres as belonging to small and marginal farmers while the average production and income would vary depending on the nature of land – irrigated or dry. Viewing from this angle, 58 percent of the number of accounts held by the scheduled commercial banks under direct farm credit portfolio belongs to SMF. Although in terms of number of accounts, the SMF took a major slice, in terms of amount lent, the large farmers had their way. It ipso facto follows that the larger the outstanding in the larger farmer group, the larger would be the NPAs in this group compared to the SMF. The NPA statistics are not as revealing as the outstanding credit. One interesting feature is that INR 70000crores was the debt-waiver programme of Government of India announced in 2007 and therefore, the outstanding credit should show a decline to this extent, in the years that followed till June 2009. The reduction in the outstanding credit does not amount to a fraction of it. Where is this waiver parked? Between them, the marginal holdings account for those with less than 2.5acres. The average size of outstanding loan per farmer also increased with the landholding size (See Table 2). Outstanding credit implies unpaid principal and interest over and above the current year’s disbursements.

Disbursement figures reflect the actual amount disbursed during the crop year commencing June every year. Table 3 gives the trend.

Table 1: Direct outstanding credit – Short and Long Term
Credit to farmers -Size-holding wise distribution.- Numbers ‘000; Amount INR crores.

Period Up to 2.5acres >2.5acres-<5acres >5acres
No. of Accts Amount No.of accts Amount No.of accts Amount
1991 6137 2895 4346 2870 3563 6624
2001 4600(-25) 7215(149) 3689(-15) 7308(154) 3555(nil) 16963(156)
2006 8239(79) 29719(311) 6677(81) 29255(300) 6321(77) 52769(21)
2009 11708(42) 60199(167) 9570(43) 59792(104) 10884(72) 99349(88)

(Figures in parentheses represent variation over the previous year)

Table 2. Per capita credit outstanding - Direct finance to farmers sizeholdingwise Indian Rupees
Year up to 2.5ac >2.5-<5ac >5ac
1991 47172 66037 186329
2001 156847 198102 477159
2006 360711 438146 834820
2009 504169 624785 912798

Table 3: Direct Credit to farmers – ST and LT disbursements – Size-holding-wise
Distribution – Number of accounts:’000; Amount: INR crores.
June-end Up to 2.5 acres >2.5 acres -<5acres >5acres Total
No. of accounts Amount No. of accounts Amount No. of accounts Amount No. of accounts Amount
1983 1304 290 652 211 616 476 2571 977
1991 1960 1181 1219 952 899 1782 4078 3915
2001 2382 3740 1860 3642 1599 7135 5841 14516
2006 5004 16823 3670 17619 3670 32682 12344 67124
2009 8544 34267 6641 33280 6811 72753 21996 140330

Source: Hand Book of Statistics: Reserve Bank of India, Mumbai, 2011

78 percent of SMF accounts had a share of 54 percent of credit in 1991 whereas it was 45 percent accounts of SMF having just 48 percent of the direct credit disbursed for agriculture in 2009 despite per account disbursement improving from Rs.2561 in 1983 to Rs.44482 in 2009. This should be so despite the year-wise short term credit disbursement targets set by the GoI since 2005, speaks of the decreasing interest in this class of clientele. State-wise analysis reveals that 82 percent of the credit disbursed continues to be in just 11 States. Interestingly, year after year, there has been shortfall in meeting the target set for priority sector, particularly agriculture, that made the Banks cough up for the RIDF, a safe and inexpensive bet for them. Proper and effective flow of credit for agriculture and more particularly for the SMF and their even distribution in the country is of crucial importance for attaining the modest 4 percent growth in agriculture sector during the Twelfth Plan. There is need for a greater push and this should be engaging the attention of the newly formed Working Group on Priority Sector set up by the RBI recently.

Sunday, September 11, 2011

MSMEs worst hit by rate hikes lose competitiveness

Micro and Small Enterprises hit by rate hikes:
B. Yerram Raju¥

MSMEs, invariably extolled as a growth engine, are in a pathetic state with the frequent hikes in interest rates on one hand and delayed payments from their vendees – large enterprises, state and central government departments and Public Sector undertakings on the other if one were to go by the discussions of the seminars that the Institute of Small Enterprise and Development, Kochi held at a few of centres like Hyderabad, Ahmedabad, Bengaluru, Chennai, Lucknow, Kanpur etc. Lending institutions, following the repeated increases in key policy rates by the RBI, raised the interest rates on advances as many as ten times in the year. Working capital is available only at a huge cost – varying from 15 to 17 percent. On one side, the debtors started mounting and on the other, Banks squeezed credit and made it costlier too. These two acts together have made them wholly uncompetitive. Most of the entrepreneurs have also expressed that Banks are most unwilling to go by the much-touted MSE risk mitigation instrument – guarantee from the CGTMSE because of the complicated procedural issues in claiming the covered amount. Several entrepreneurs also expressed serious reservations on the way the RBI monitors its instructions relating to the credit for the sector. This brief article looks at some of the data available in this regard in the light of the ire of the customers in the sector.

I tried to look at this from the data put out by the RBI in its latest Annual Report and other reports of SIDBI. In 2005-06 annual budget of the Union Government, the Finance Minister announced that each commercial branch, on average lend to at least five new units per annum. This would mean an average of 3lakh to 3.5lakhs. There is no evidence that this guideline has ever been monitored by the RBI. If this were to happen, then during the last seven years 26-27lakh new units and along with them employment to at least 11-12mn persons would have been created.

SIDBI the Bank dedicated for micro, small and medium enterprise credit also moved to medium enterprise credit and totally ignored the micro and small enterprise credit. During the year, 2009-10 the variance in credit outstanding to the MSE is 22.1% and medium enterprises is 8.6%. The Banks seemed to have hurriedly corrected their portfolio in this area in 2010-11: MSE credit has fallen to 11% and medium enterprise credit increased from earlier 8.6% to 39.2%. One possible explanation that the MSME Ministry and the Banks too would be conveniently offering is that so many enterprises migrated from small to the medium category because of the growth impulses generated in the economy. But the fact is that the job oriented and production intensive micro and small enterprises actually took a beating at the hands of the dexterous and enthusiastic bankers. Similarly, one will be astonished at growth in financing to NBFCs by Banks, which has increased from 14.8% in 2009-10 to 54% in 2010-11. This is nothing but lazy banking. Quite likely, that the NBFCs are financing the Agriculture and MSE sectors at high rates of interest. This needs a deeper probe.

Even otherwise, out of 261mn enterprises in the sector, only 36mn enterprises are under the umbrella of institutional credit representing just 13.79 percent. As at the end of March 2010, the total outstanding credit provided by all Scheduled Commercial Banks (SCBs) to the MSE sector was iNR 3.62bn accounting for 13.4 percent of the Adjusted Net Bank Credit. Credit flow (ANBC) to MSEs had therefore, nearly tripled from INR 1.27bn in 2006-07. Per unit, credit is of the order of INR 6.22lakhs. By June 2011 only 80 units have been added in Bankers’ books and per unit credit has gone down drastically to just INR 0.98lakhs. Year on year growth target of 20 percent for the sector, fixed by the RBI is nowhere in sight. In fact, as can be seen from the above table, it has fallen down from 13.4 percent in July 2010 to 9.9 percent in July 2011. While the lenders felt that credit to the sector is expanding, the MSME borrowers felt that the lenders are not doing enough for the MSMEs and are catering more to the needs of the large corporates. According to the fourth census (2006-07), only 7% of the total MSME use finance from institutional/non-institutional sources whereas a majority (92%) either do not use credit or self-finance their establishments.

Chakraborthy Committee (2007) recommended that all units requiring credit up to Rs.10mn should be assisted at the Branch level as such units require proper due diligence, monitoring and supervision. Banks have migrated to centralized processing platforms and even then, entrepreneurs of standing shared with me that their proposals take no less than two months. Their queries are based on the templates created and not on enterprise capacity and entrepreneurial capability.

Credit Rating, less said the better. Under the centrally sponsored scheme, the credit rating of a micro and small enterprises is assessed on a scale tailor-made for the small entities. The scale comprises assessment on performance capability and financial strength. Until March 31, 2010, 19,233 small entities have been rated by 7 empaneled rating agencies, with more than 12,500 small entities having been rated in the FY 2009 and FY 2010. Twenty thousand enterprises out of about 36mn getting rated is a drop in the ocean. The rating agencies are not able to sell their rating products because their rating models are a poor replica of corporate debt rating products.

The demands on the MSMEs in terms of technology infusion, cloud computing, environmental friendly processes, and HR interventions, just to highlight a few, are on the rise. But who would give the money for all these and ensure that they are in the globally competitive arena, if the banks show the door and private equity is an uninviting mood? In fine, the saga tells us that new MSE units financed are far and few; per capita credit is on the decline; interest rates are on the rise; risk management of the sector poor; collateral dependence continues to rule roost; innovations almost stagnant and there would appear to be risk aversion. It is time that the RBI wakes up to reality and takes appropriate policy corrections in the interest of growth.

Gimmicks in loaning to the poor

Strange are the ways of the Government. It wanted to distribute INR 10000 to the poor through the Public Sector Banks - a different route for the loan melas. Collective diligence and individual sensitivity are the hallmarks of effective lending to the poor that would create in the short-run alternative livelihoods and enduring assets in the long run. The Regulator, RBI, should take all the required courage to counter this loan distribution, whatever name one chooses to give to it.

Tuesday, September 6, 2011

Shashi Rajagopalan

The Lady who changed many lives:
Ms Shashi Rajagopalan left a void behind her on the fateful day of the 5th August 2011. When I first met her almost thirty years back, when the Cooperative Development Foundation - the SAMAKHYA as was known, she was helping late Mr. E.V.Ramreddy, and Mr M. Rama Reddy, present President in putting forth funding proposals, advocacy materials on cooperatives of the then new genre - the true cooperatives. She strived hard to influence all the people she worked with to a discipline in thinking and approach. Accountability and transparency, true to their words, were her imprint. Extension work in cooperatives and cooperative advocacy - she took to a logical conclusion by making nine States formulate a new legislation on cooperatives which is now familiarly known as Mutually Aided Cooperative Societies Act (MACS Act). She never hesitated calling a spade a spade. She is a forceful speaker on MACS. I had an interesting experience. She requested me to accompany to Lucknow to address a crowd of women interested in forming SHGs. Both of us were not very familiar with Hindi lingual. We had to speak in Hindi only if we were to carry our message. We mixed Hindi with English and in the end we noticed that we were understood! She has indomitable courage at facing issues. She never compromised small details. I had the unique experience of working with her on the CDF Board for a decade and the papers for the Board Meetings had her thorough scrutiny. Any mistake she never hesitated owning up. Very few can match her as a tall leader in cooperative movement in our country.

Wednesday, July 6, 2011

Does capital cap it all?

Does Capital, cap it all?
Basel II new Operational Risk Guidelines a threat or opportunity?
Yerram Raju and Rao N. Venuturupalle*
‘Wholesale banking in India is set for a period of sharp growth. Revenues from wholesale banking activities are likely to more than double over the next five years as infrastructure investment, expansion by Indian companies overseas, and further “Indianization” of multinational businesses, among other trends, drive new business. Foreign players and the country’s domestic banks, however, will find themselves in a tough com¬mercial environment and must overcome a range of challenges if they are to maintain, or assume, a leading position in the market. (Akash Lal and Naveen Tahilyani, McKinseys 2011) In the context of globalization and shadow banking, there is a genuine concern on the part of regulators that the operational risks would be on the rise and that they need to be provided for in the banks’ balance sheets adequately. It is this ‘adequacy’ that is likely to upset the applecart of commercial banks’ expectations, more so, when multiple channels and universal banking are embraced. The global risk scenario remains icing on the cake although between 2008 and 2011, there is considerable improvement. This article would like to deal with the emerging financial system in India in the first part and the concerns arising out of the recently put out Basel document on the Management and Supervision of Operational Risk: governance, risk management environment and the role of disclosure. Part II examines the principles and various aspects of OR management vis-à-vis the prevailing operational processes and practices in some of the major Indian banks. The paper also presents the challenges, potential costs and benefits in implementing the proposed best practices.

Part I
Indian Financial System (IFS) has its generic novelties and complexities. It embraces cooperative banks under two streams – urban and rural with a three-tier structure; commercial banks comprising of public sector banks; private sector banks (old and new generation); regional rural banks including local area banks; and foreign banks. It proved resilient under the recent global recession era thanks to the robust regulatory system that took care of capital adequacy concerns with the twin instrumentality of Statutory Liquidity Ratio and Cash Reserve Ratio among others and a low leveraging. These five streams of banking in India have wide-ranging variances in adoption of technologies – primitive in the cooperatives to the most advanced in globally placed banks like the State Bank of India, ICICI Bank and foreign banks. The most virtuous aspect of regulation has been the compliance discipline of these institutions. In line with the ongoing supervisory and multiple regulator concerns, a Financial Super Regulatory Board had been set up and the central bank was entrusted with the coordination role. The central bank started releasing the financial stability reports (FSR) at frequent intervals commencing from March 2010 to reflect the health of the Indian Financial System. The latest FSR states that the ‘Indian financial system remains stable in the face of some fragilities being observed in the global macro-financial environment. Growth is slackening in most parts of the world, even as the risks from global imbalances and sovereign debt crises in Europe continue to hover. The uncertainties in global environment with persistently high energy and commodity prices have contributed to a slight moderation in India’s growth momentum as well. The macroeconomic fundamentals for India, however, continue to stay strong, notwithstanding the prevailing inflationary pressures and concerns on fiscal fronts.’ India is among the sizzling top seven emerging market overheating index of the Economist (London – June 2011), measured in terms of six indicators - inflation, spare capacity, labour markets, excessive credit expansion, real rate of interest, and widening current account deficit. In the short-term, Fitch has lowered the growth rate at 7.7 percent (June 2011) in this background whereas Standard & Poor predicted a robust inflow of FII and FDI resources into the economy. The growth projections of Indian Banking even in the wake of overall uncertain economic growth, is intriguing.
Last two years witnessed an increasing trend of frauds, misappropriations, embezzlements, ATM robberies, technology security failures in quite a few centres in the entire banking spectrum and all of them fall under the band of Operational Risk. RBI directs Banks to report every fraud above Rs.1lakh to their Boards promptly; frauds by employees for amounts exceeding Rs.10000 to the local police; cases involving more than Rs.7.5cr to the Banking Security and Fraud Cell of the Economic Offences wing of the CBI; and cases of cheating involving Rs.1crore and above to the CBI. Latest RBI guidelines (April 29, 2011) on banks’ technology governance, information security, audit, outsourcing and cyber fraud as a possible reaction to the surfacing of operational risks in increasing measure lately, are a pointer to further investments in those areas to mitigate Operational Risk.
Even in the backdrop of rising systemic risks in the banking ecosystem in Euromarkets leaving little hope, the RBI Governor succinctly summarized the concerns of Basel III and exuded confidence that the Indian banks would be able to meet up with the capital expectations. But does capital cap it all? - Is the question.
Part II
The earliest Basel Committee publication on Operational risk was a compilation of information on management of operational risk at thirty major banks from different member-countries. We are of the opinion that awareness of operational risk as a separate risk category and processes for measurement of the same was then at a nascent stage. However, a series of high profile incidents at Barings Bank, Daiwa Bank and Allied Irish Bank (to name a few) in the late 1990s heightened the need for regulation of operational risk. In India, the State Bank of India and Punjab National Bank – both in the public sector, take such credit in the second half of the first decade of the current millennium.

Operational risk was first recognized as sensitive to capital adequacy and given explicit treatment under Basel II Accord. Together with The Sound Practices for the Management and Supervision of Operational Risk(2003), the Accord laid down principles for effective management of operational risk, best practices for governance, identification and assessment, monitoring and reporting, control & mitigation etc. Besides these, the Accord also covered approaches for calculation of regulatory capital for operational risk. In response to these regulatory developments and prevention of operational failures, banks and supervisors have expanded their knowledge and experience in implementing ORM framework – loss data collection, modeling capital requirements, implementation of governance structure and other steps. For instance, formation of ORX (Operational Risk data eXchange), a repository of external operational risk loss events, is an initiative that would aid in exploring adequacy or weaknesses of internal controls, operational risk modeling and capital calculations etc.

Despite these developments, the fundamental reason for recent credit crisis was operational inefficiencies – lax underwriting standards, unbridled risk taking etc. – that eventually brought the interconnected world economy into a recession the likes of which was last seen only during the Great Depression.

Closer home, the systemic impact of credit crisis was much less because of timely interventions by the central bank, the RBI, by way of reining-in the economy using macro-economic variables CRR and SLR. However, this does not mean there are no operational inefficiencies in the Indian banking system. Most banks’ approach has primarily been compliance to regulation with minimal or no importance to imbibing a risk culture seeping through the entire organization. Risk evaluation is integral to everything that individuals do. Yet organizations often treat risk as an adjunct added on at the end of the process – ‘Let us do a risk assessment and see where we are.’ Such an approach is wholesomely inadequate. Instead, risk must be factored in at the beginning of an initiative and should remain a focus throughout the entire process. Given the expected growth in the Indian economy during the Twelfth Plan at an average of ten percent, and the concomitant growth in the banking industry, cultivating risk culture becomes imperative for the industry.

Based on the developments with respect to regulation and upheavals in the banking industry the world over in little over a decade, it can be concluded that the operational risk discipline is still evolving.

Collection of loss incidents data
Loss data collection (either internal or external) provides meaningful insight into effectiveness of internal controls, modeling of operational risk and capital calculations, and could provide information about previously unidentified risk exposures. For this to be effective, banks must have comprehensive documented procedures for capturing loss incidents data –
i) mapping of activities along various business lines
ii) define loss thresholds for each business line for the purpose of identifying those events that could have material impact on the bank’s balance sheet
iii) mapping loss data to appropriate business line (and sub-categories) and event types
iv) tracking of Internal loss data collection

It is generally observed that majority of the public sector banks in India have material business in around five of the eight business lines recognized by BCBS. Availability and reliability of loss event data in these business lines deserves lot of attention and much needed action, for, a branch that has not reported any loss data cannot be construed as functioning excellently. In order to improve internal data collection, clarity on collection of loss events data and their assignment to appropriate business lines is essential. Additionally, clarity on potential losses, near misses, attempted frauds, etc. where no loss has actually been incurred by the bank will go a long way in strengthening internal systems and controls. Active involvement of the Risk Management Committee of the bank could very well help in providing direction to this very important aspect of operational risk management.

OR governance and risk management function

Sound internal governance is fundamental to effective operational risk management framework that is fully integrated into the bank’s overall governance structure in risk management. The board of directors together with the senior management should lead the Governance processes to establish a strong risk culture. An industry best practice for internal governance is to have in place a 3-tiered structure:
i) business line management – responsibility of identification and management of risks inherent in a bank’s products, services and activities rests with the business units
ii) a functionally independent corporate operational risk function complementing the business line’s operational risk management activities and responsible for the design, maintenance and ongoing development of operational risk management framework within the bank.
iii) an independent unit performing review and challenging the bank’s operational risk management controls, processes and systems, typically, an audit function

A general observation in the Indian Banking industry is that the business lines and risk management departments are compartmentalized with no clear objective and direction from the senior leadership to bring these to work supportively towards a common objective of improving operational processes and shareholder value. The Risk Management department should be directly reporting to the Risk Management Committee of the Board instead of reporting to the CEO so as to ensure that revenue targets are pursued within the boundary of risk processes controls.

The role of the Board of Directors as mentioned under Principle (3) seems to be far-fetched and impractical especially in Indian Public Sector Banks. It is not possible for the non-executive directors to go into the detail required to ensure the firm is managing “operational risks associated with new strategies, products, activities, or systems, including changes in risk profiles and priorities”. This responsibility is more appropriate to senior management of the bank with the Board as an overseer.

Reporting and monitoring of operational loss data

Operational data – both qualitative and quantitative – could provide valuable insights into effectiveness of ORM framework, weaknesses in policies and procedures and measures needed to plug these, risk profiles, deviations from risk appetite, capital requirements and lot other information. Given the breadth and complexity of data, business intelligence tools can be used to present this data in the form of reports and pictorial dashboards to provide meaningful information to senior management and board.
For the Indian banks, there are a number of reasons that clearly justify the need to adopt business intelligence and data analytics tools:-
a) The 8.0% plus economic growth observed in the past decade and projected in the future
b) The recent economic crisis has shown that markets the world over are interconnected.
c) RBI’s mandate for an inclusive growth
d) Huge customer base in India
These tools will certainly help in proactive risk management and timely availability of reports to the senior management and the board.
Importance of audits
One of the sound industry practices for operational risk governance is setup of an independent audit unit that reviews and challenges the bank’s controls, processes and systems. The internal audit should not only be testing compliance to approved policies and procedures but should also be evaluating whether the ORM Framework meets organizational needs and supervisory expectations.
In general, the Indian banks have an audit department but lack importance and management oversight. These departments mostly perform transactional audits but gaps in underlying processes are never identified. Moreover, closure of audit findings continues to happen mechanically and there is no trail of audit compliance. Consequently, such a practice exposes the bank to loss of revenue, customer confidence and reputation.
Risk education, training and staff with required skills
An ORM framework is effective only when all departments implementing and evaluating the framework are staffed with required training and skills along with a continuous focus on education in risk. To this end, the board of directors and senior management must provide the required support and oversight.
There is a general feeling both among the regulators and the individual banks that the professional directors like the Chartered Accountants would take care of the risk management oversight better than the rest. Yes; only to a degree. Several Chartered Accountants also require intense knowledge and skills in the discipline of risk management. The ICAI has to put in place such arrangement, if necessary, by coordinating with knowledge providers of global repute like the Professional Risk Managers’ International Association (PRMIA) or GARP. When APRM, PRM, and FRM get premium attention in the placements and promotions to staff to handle the risk management function, there would be scope for professional directors to perform the risk management function more skillfully.

The budgets for risk training and education were inadequate. All employees in general and audit department, in particular, must be appropriately staffed with required training and skills along with a continuous focus on education in risk. To this end, the board of directors and senior management must provide the required support and oversight.
Implementation of proposed framework – costs and capital considerations
i) Operational risk cannot be treated as residual risk after accounting for credit and market risk. A leading public sector bank, capital at a maximum of 5 percent of the total risk weight assets is set aside for operational risk. This is certainly short of required adequacy for a bank of its size. Appropriate OR processes must be in place to enable calculation of required OR capital.

ii) The cost of implementation of the OR framework – particularly in regard to data collection and data analytics – is considered onerous and such costs cannot be passed on to the customers as is done in the areas of credit risk and market risk. The Central Bank could consider treating such costs differently and provide enough cushions for competitiveness. The Central Banks should incentivize banks which adopt data collection and data analytics tools for mitigating operational risks or capturing near misses by way of tax benefits or other subventions.

Timelines for implementation of AMA approach

Banks in India would be requiring time until 31st March 2014 to be in preparedness for adopting the AMA when alone it would be possible to secure high integrity data for the past 20 quarters under all data requirements. A step in the right direction is the formation of CORDEX (Compilation of Operational Risk Loss Data Exchange) initiated by Indian Banks’ Association. Such industry level data could very well be used for scenario and stress testing. However, this is in its formative stages and the Central Bank may itself take two years to validate the system.

Operational risk management is receiving immense importance and focus from all stakeholders – regulators, senior management & board and investors. Whereas credit and market risk management have matured considerably in the last couple of decades, operational risk management is still an evolving discipline.

Many banks world over have made considerable progress with respect to implementing an ORM Framework. Indian banks, however, have made some progress but this has been seen more as mandate for compliance than as a need for driving a risk management culture throughout the organization that will eventually reduce operational losses and improve shareholder value. In this respect, board and senior management oversight is the need of the hour.

Also, the ORM Framework must be periodically reviewed to ensure controls in response to material & non-material losses are implemented. Investments have to be made in training and education, and data analytics and business intelligence solutions as these will help in spreading a risk culture of highest quality throughout the bank and enable proactive risk management. Banks also have to make considerable investments for collection of loss data and for putting in place policies, procedures and controls before they can adopt AMA approach for calculation of operational risk capital.

The foregoing analysis clearly reveals that mere provisioning of capital of a high order does not insulate the banks from all the risks and the 2007 recession has proved beyond doubt that neither the size of the bank nor the size of the provisioning has insulated the bank from the catastrophic downfall. Robust processes are more important than mere provisioning of capital to take care of the commonly arising risks. These apart, the ORM is yet to capture the reputation risk as its measurability has some issues to debate. In essence, all the eleven principles highlighted in the Basel II document of December 2010 provide an opportunity to sprucing up the banks’ risk management platforms marginalizing the threat to adequacies of capital provisioning.


1. ‘Sound Practices for the Management and Supervision of Operational Risk’, Basel Committee on Banking Supervision, December 2010.
2. ‘Round Table on Sound Practices for Management and Supervision of Operational Risk’, PRMIA Hyderabad Chapter, January, 2011.

* Dr B. Yerram Raju is an economist and Regional Director, PRMIA, Hyderabad Chapter and Mr Rao N. Venuturupalle is Dy. Regional Director, PRMIA, Hyderabad Chapter and Lead Consultant, HSBC, Hyderabad. The views expressed are personal.

Saturday, June 11, 2011

Credit Rating Agencies and SME sector in India

B. Yerram Raju*

Credit rating agencies (CRA) are organizations that rate the creditworthiness of a company or a financial product, such as a debt security or money market instrument. CRAs attracted the ire of the investors in the context of the global financial crisis and the Securities Exchange Commission of US also reformed them after long debates in the Senate. Alive to such ongoing debates, SEBI’s disclosure norms relating to rating agencies in 2010 received wide appreciation. These would apply to corporate credit ratings. When we have integrated with the financial system globally, we need to see what reforms are round the corner in making assembly line credit flows to the corporates and SMEs, more effective.

Lakhs of crores involved in scams notwithstanding, the economy is on the growth trajectory clocking 8.25 percent growth with a seesaw growth in manufacturing sector. Micro, Small and Medium Enterprises have a special dispensation at the hands of the regulators and there is a Ministry at the Centre dedicated to this sector to ensure its development mainly because of its potential to contribute to the job growth and growth of the economy. Growth of this sector always outstripped the growth in manufacturing sector. After redefining the sector in the MSME Development Act 2006, there is enough evidence to show that Banks moved to medium enterprises swiftly. SIDBI, the Bank dedicated for micro, small and medium enterprise credit also moved to medium enterprise credit and totally ignored the micro and small enterprise credit. Equating micro finance with finance to micro and small enterprises is a fallacy. RBI’s published statistics for 2009-10 show that the variance in credit outstanding to the MSE is 22.1% and medium enterprises is 8.6%. The Banks seemed to have hurriedly corrected their portfolio in this area in 2010-11: MSE credit has fallen to 11% and medium enterprise credit increased from earlier 8.6% to 39.2%. This could mean two things: there is migration of the small sector to medium sector – and if it happens, it is the best thing to happen for the economy. The other, Banks started distancing from the micro and small, because lending to them involves higher transaction costs and greater supervision. This is not good for the economy, as these are the seedbeds of entrepreneurship and employment. Medium enterprise credit is rating driven, thanks to the Basel norms.

The Chartered Financial Analysts did a global survey in 2009 to confirm that the ratings are not useful instruments to take investment decisions, irrespective of who delivers Fisch, Moodys, Standard & Poor etc. Although debt rating started late in India, and these rating agencies with their compatriots, CRISIL, ICRA etc., were only rating investments in the past, they are the most respected rating agencies recognized by the regulator, RBI even in India.
Most Banks, which are wont to go by the advisory of the RBI, have now come to swear by them. Most Indian Banks also moved to template lending or Assembly line approach to lending through the Centralized Processing Platforms redefining their approaches to do due diligence of the enterprises they finance. Speed has become the essence of the game of competition among banks. Now that the futures markets and derivative markets have become more active than before, and their late entry into debt rating is more by patronage of the Banks and FIs, it is important that the other regulator – RBI- also looks at the Report Card on rating agencies and resolve certain inherent conflicts. The Credit Information Services are at a nascent stage, CIBIL being the first to start such service with collaboration from Dun & Bradstreet and many commercial banks. Transparency in client information is a long way to go, as unshared data is more than the shared data both about individuals and institutions. In this scenario, the RBI also should consider issuing detailed instructions on rating agencies, their ways of assessment, forms and reports in the public domain. In any case, it is desirable that until the credit information repositories scale up in size and efficiency in providing the required data to reduce the information asymmetry, the rating instrumentality application to the SME sector has to be put on a low key.
In India, the track record of the Rating Agencies may not have much to show up in favour or against them. There is no evidence of any of the rating agencies reducing the ratings to any large industrial enterprise on the ground that they owe monies to their vendor SMEs for more than the contracted period for all payments of more than Rs.2lakhs as required under the Companies Act, 2000. The RBI should actually insist on different rating agencies for rating the Corporates and their related SME vendors. It is also desirable that the payment for rating agencies should come from the institutions that seek rating. It is a different matter if such amount is later recovered from the liability firm.
In essence, there should be a mechanism to evaluate the performance of Rating agencies. Further, the method of payment also needs to be linked to the extent possible to evaluation. Their services have value but to what extent one should depend on their rating also needs to be quantified. There should be a recompense clause and the rating agencies should be made to compensate may be, not to the full extent, but by way of penalty for wrong ratings or variance in rating on a large scale. Their rating performance over a period has to be made transparent for the benefit of investors and for every one connected to evaluate.
It is time that the Banks go back to basics and do due diligence and seek support from the CRA just as yet another support for their credit decision until full scale reforms in credit information and credit rating take off in the financial sector.
------------------------------------------------------------------------------------------------------------*Dr.B. Yerram Raju is an economist and Regional Director, Professional Risk Managers’ International Association (PRMIA), Hyderabad Chapter. Can be reached at

Credit for Agriculture and MSEs on the decline in 2010-11



The dwindling share of agriculture in the nation’s GDP, now oscillating between 16 and 17 percent notwithstanding, people dependent on agriculture continue to be hovering round 60-62 percent. Agriculture sector recorded a 5.7% growth within the overall 8.6% GDP growth. Growth in manufacturing sector continues to be a concern although the growth in MSME sector exceeded the growth in manufacturing. Growth in employment improved in the services but it continues to be a concern in manufacturing sector. In this scenario, the RBI’s annual monetary policy chose to bypass the falling credit in agriculture and MSE sectors by telling that the sectoral growth moderated while the commercial growth picked up. It also mentioned that the “credit conditions generally remained supportive of economic activity”. When agriculture production and small enterprise production increased as reflected in their growth rates, if credit for these credit-sensitive sectors declined, the deficits are made up obviously through some other channels. The private moneylenders are active and before there is another spate of suicides, these deficits should serve as a wake up call. Analysis of the factors responsible and actions necessary are worthy to enquire.

Farmers are on the streets, but not without reason. There is increasing demand for inputs in the context of favourable monsoon during the last two seasons. We witness farmers crying over the inundated paddy stocks in market yards in Andhra Pradesh as the storage godowns fall short of the demand. The other day, valuable chilly stocks were fully burnt out in the cold storages in Guntur. Cotton farmers bemoan of traders holding seize of the markets to deny them the due price. Lack of planning stares at us in every area concerning agriculture, from production to marketing.

The Banks show up the mandated 18% credit to agriculture in figures. UCO Bank claimed Rs.4000crores given to Rural Electric Corporation as credit to agriculture. The RBI was quick to instruct the bank to correct the classification. There are many banks camouflaging the figures whereby the corporate credit is shown under credit to direct agriculture and claim having met the mandated requirement. RIDF any way shields the shortfall. Both NABARD and RBI stopped monitoring the flow of credit to small and marginal farmers and tenant farmers. Investment credit for agriculture – direct has been progressively on the decline during the last ten years, indicating fall in private capital formation in the sector. The latest statistics of RBI relating to flow of credit to agriculture are very revealing. Year-on-year variation for agriculture and allied activities even after all the window dressing by the banks has crest-fallen from 22.9% in 2009-10 to 10.6% in 2010-11. This actually represents the fall in stock as the variance is in terms of outstanding credit. Quarter to quarter variation in farm credit between December and March in any year, does not make much sense as this period mostly accounts for recoveries barring a few cash crops like sugarcane.

For a change, let me look at another area of the priority sector – the micro and small enterprise credit portfolio. This is a sector where guidelines were issued to cover at least five new units per branch per annum. There is no evidence that this guideline has ever been monitored by the RBI. SIDBI the Bank dedicated for micro, small and medium enterprise credit also moved to medium enterprise credit and totally ignored the micro and small enterprise credit. During the year, 2009-10 the variance in credit outstanding to the MSE is 22.1% and medium enterprises is 8.6%. The Banks seemed to have hurriedly corrected their portfolio in this area in 2010-11: MSE credit has fallen to 11% and medium enterprise credit increased from earlier 8.6% to 39.2%. The job oriented and production intensive micro and small enterprises also took a beating at the hands of the dexterous and enthusiastic bankers. Similarly, one will be astonished at growth in financing to NBFCs by Banks, which has increased from 14.8% in 2009-10 to 54% in 2010-11. This is nothing but lazy banking. Quite likely, that the NBFCs are financing the Agriculture and MSE sectors at high rates of interest. This needs a deeper probe.

Sector Variation (Y-o-Y)
In Outstanding credit
2009-10 2010-11
% %
Non-food Credit 16.8 20.6
Agriculture & Allied Activities 22.9 10.6
Industry (Micro & Small, Medium and Large ) 24.4 23.6
Micro & Small 22.1 11.0
Medium 8.6 39.2
Large 27.4 24.1
Services 12.5 23.9
Source: Reserve Bank of India May 2011, p626.

Let the Government, the owner of 85% of the banking system, look into the underperformance of Banks in Agricultural Credit and Priority Sector Advances and put in place more stringent disclosure and compliance norms. Let each Bank reveal their actual credit exposure to Agricultural Credit and Priority Sector Advances in their Financial Statements published in newspapers both in terms of number of farmers and enterprises covered and amount disbursed that should stand the rigid regulatory scrutiny. Punitive action for wrong classification should follow. In any case when do we monitor the flow instead of stock of credit to farm and MSE sectors?

*The author is an economist and Member, Expert Committee on Cooperative Banking, Government of AP. The views are personal.

Time for Restructuring State Ministry of Agriculture


It is heartening to listen to the CM Kiran Kumar Reddy at Bangalore on the State’s prospect of posting a 6.5 percent growth and the State’s economy to leapfrog to 9.5 percent. There is also a goal for the State to reach 300mn tones of food production by the end of the Twelfth Plan. The State needs such optimistic thinking and approach at this critical juncture. But when one looks at the serpentine queues of the farmers for the seeds of any crop right at the sowing time, poor management of the farm sector stares at us. This is not the first year that the State has this predicament. In the marketing season, farmers bemoan of lack of space to store, and nobody to deliver the price for their season’s hardship. We just witnessed in most market yards the paddy bags under sheets of water; not enough gunny bags to store; not even enough tarpaulins to store; no storage space in the existing godowns. Chilly farmers got their crop washed out in the untimely rains or burnt in well-designed cold storage warehouse disasters. The tenant farmers’ rejoice at their right for institutional credit through the recently announced ordinance hopefully results in the intended benefits – the only silver lining in this farm season, to site a good beginning. Why are all these happening for the last few decades? Why should farmers take to streets to fight for their basic production rights? Are there no remedies? Do these questions not beg of us to look at the fundamentals of administrative architecture of this most important sector on which 60 percent of the population still depends for their livelihood?

Like nowhere else in the world, farm and allied sectors are looked after by at least fourteen ministries and a host of organizations heavily bureaucratized: Ministry of Agriculture; Ministry of Animal Husbandry, Dairy Development, Fisheries; Ministry of Major and Medium Irrigation; Ministry of Cooperation; Ministry of Revenue, Relief and Rehabilitation; Ministry of Finance; Ministry of Food & Civil Supplies; Ministry of Marketing & Warehousing – at the State level and Ministry of Agriculture and Cooperation, Ministry of Food Processing; Ministry of Finance; Ministry of Forests & Environment; Ministry of Commerce and Trade; Ministry of Food and Civil Supplies at the Central Government level. There is State Planning Board and the Union Planning Commission at the helm to decide on many issues that concern all these ministries. Each Ministry has its regulatory strings to apply on the farmer because each is an empire unto itself and there is no coordination among them at the beginning of the agriculture season. Planning Commission long back seized to be a coordination agency. It is content with preparing grandiose plans and allocating limited resources through discussions at the National Development Council. Exigencies of politics predominate over economic necessities.

In Agrarian States like Andhra Pradesh, a beginning could be made in reorganizing the ministries to start with and bringing the departments of agriculture, horticulture and allied activities like animal husbandry, fisheries, that deal with production, cooperation, marketing and civil supplies that deal with distribution under single Minister who should have full comprehension and empathy for the farmers. The orgnisational structure could be as follows:

This would mean that the number of ministries at the State level would be reduced to one from the existing four. At the beginning of the season, all the above functionaries would have a meeting with all the functionaries in the chart for a day or two – even now the Commissioner of Agriculture is holding a coordination meeting with the NABARD, financing institutions and cooperative banks and his department officials at the beginning of Kharif and Rabi. These meetings are not transparent and monitorable in terms of the decisions taken and officials concerned are not accountable for any lapses or shortfalls. In the above coordination meeting, the Minister presiding and the Agriculture Production Commissioner who is of the rank of Additional Chief Secretary, is expected to be fully informed of all the links in the supply chain in production and value chain management in agriculture right up to the distribution end and would be in a position to format the decision making process depending upon the various issues that come up for discussion. The Minister can also invite the principal secretary (Energy) and Principal Secretary (Information Technology) for the half-yearly meetings to take into consideration the issues and facilitation that could come from them to the farmers during and off the season. Principal Secretary (Agriculture) should be the Member-secretary for this coordination panel. He would draft the minutes within the next twenty-four hours and arrange for issuance of appropriate instructions for all these line departments to follow implicitly and the concerned departmental heads would be squarely responsible for any and all lapses in implementing them. During the week that follows, the State Level Bankers’ Committee should be convened to cause the financial arrangements to be put in place. This mechanism would expand the burden of implementation on those who are actually responsible. Transparency, Accountability and Governance would significantly improve.

Whenever the disasters occur, emergency meeting shall be held to take collective decision for coordinated implementation at the field level through the District Collectors. The Minister for Revenue would coordinate with the Minister for Agriculture in situations of natural calamities and other disasters.

These measures would make a significant departure from each department pulling in different directions making the farmers cry loud both at the beginning and end of the season. The State would also have the pride of taking leadership once it ensures success of this model. The Rythu Chaitanya Yatras, Polam Badi, Atma, AIBP would automatically be integral to the whole effort and extension would be in a position to deliver results to the farmer. This would also help in reducing unnecessary expenditure in multiple delivery points in meaningless directions. Chief Minister Kiran Kumar Reddy, young and dynamic and sportive as he is, would be able to lap up electoral benefits from the largest voting constituency, viz., the farmers and could also win the hearts of the opposition. What matters, of course, is the courage to dispense with three Ministers!!

*The Author is an economist and Member, Expert Committee of Cooperative Banking, Govt of AP. The views are personal. Can be reached at

Sunday, February 13, 2011

Drive against Corruption - Avineeti pi poratum

There should be a resolve not to share public platform with the corrupt and allegedly corrupt. The lobbying organizations like the FICCI,CII, FAPCCI etc should stop giving bouquets and garlending such persons.This is the most simple step one can take to express public resentment against corruption and intellectuals with integrity have a role to play in this direction.

Tuesday, January 25, 2011

Malegam Report leaves more questions than answers

Malegam Committee on Micro Finance
Leaves more questions than answers.
B. Yerram Raju*

MFIs were balancing between equity and discipline – the area that the other lending arms in the country, both the commercial and cooperative banks failed to perform. Nurturing them, therefore, is essential for achieving the goal of financial inclusion. It is good to recall what M. Narasimham, the architect of Financial Sector Reforms in India told when the Reforms ushered in: the Banks and Financing Institutions should be freed from the regulatory bondage in interest rate fixation and prescriptive approaches to specific clientele groups-behest or directed lending. During the last two decades while many positive efforts in the Reform Agenda saved the country from the Asian and global crises situations under the able stewardship of illustrious Governors, there were also gaps that needed a pragmatic attention. One such gap is Micro Finance regulation. Does Malegam Committee provide any solutions? Or leaves many unanswered questions? This is what this article intends to examine.


Following RBI circular dated 18th February 2000 providing guidelines to financing of MFIs by commercial banks, there has been rapid increase of private MFIs in the country during this decade. Most of these MFIs are broadly in four categories.

1) NGO MFIs – Registered under Societies Registration Act 1860 and/or Indian Trust Act, 1880
2) COOPERATIVE MFIs – Registered under State Cooperatives Act or Mutually Aided Cooperatives Act (MACS) or Multi-State Cooperatives Act, 2002.
3) NON-BANKING FINANCIAL COMPANIES(NBFC) MFIs- Registered under Section 25 of Companies Act, 1956 (Not for Profit)
4) NBFC –MFIs – Registered under Companies Act, 1956 and Registered with SEBI where they went in for public issue and/or with RBI.

In order to encourage the MFI movement, the RBI desired that they go under self-regulation mode and the RBI expressed categorical “NO” to MFI regulation. On the top of it, the Central Bank categorized all corporate loans granted to MFIs as part of priority sector lending and the public sector banks found a bonanza in such categorization as they can claim credit under somebody else’s shoulder without having to incur the huge cost of reaching the poor and realizing such loans again at a huge cost. Suddenly they found a de-risking their otherwise high-risk portfolio. Bulk loaning to MFIs moved at 8-12 percent for online lending to the poverty groups.

The bulk lending in the MFI robes, on the other hand, has taken the ugly turn witnessed during September-November 2010 prompting the former Governor RBI, Dr. Y.V. Reddy calling it India Sub-prime story, due to the following reasons:
1. The incentive of booking such credit under the priority sector
2. Banks that usually stipulate stringent conditions on the high-risk ‘poor’ refused to see a part of it even when lending to MFI because of their myopic approach to priority sector credit.
3. The Commercial banks were quick to respond to the glossy balance sheets; foreign flows and the bee-lining of venture capital funds because of the minimum of 8-12 percent yield on these assets and near 100 percent repayments.
4. The investors walked away with the high returns, which is nothing but the rich walking on poor man’s incomes. Poor man’s rupees walked into rich man’s dollars. This is not certainly what either the Government or the RBI intended when they spoke of financial inclusion.
5. Micro Insurance is not linked.
Corporate greed overtook the poor man’s need. Banks too were no less greedy as they could fulfill their priority sector targets without actually having to go near the poor.

Even most of the private sector banks that were unable to fulfill their Priority Sector obligations due to their lack of presence in Semi-Urban and Rural Centers or lack of initiative in financing SME or other Priority segments, have found an easier option of providing bulk loans to MFIs. This paved the way for large-scale flow of depositors’ funds to MFIs for their onlending activities. There are 44 RBI recognized MFIs in the country according to Microfinance Institutions Network. Some well meaningful entities have put the training of the poor in viable economic homestead and village level activities ( BASIX for example) and created enthusiasm and confidence in institutional lenders for this activity. But greed has no boundaries and seeing large-scale benefits with a little effort and much propaganda, others bee-lined and Banks qued up to lending to the opportunistic and showy MFIs. This led to mushrooming of MFIs accessing huge funds from Commercial Banks for their onlending activities. Most commercial banks lent them for 12 months with the result the MFIs had to recover in weekly repayments. According to Malegam Committee: “As at 31st March 2010, the aggregate amount outstanding in respect of loans granted by banks and SIDBI to NBFCs operating in the Microfinance sector amounted to Rs.13,800 crores. In addition, banks were holding securitized paper issued by NBFCs for an amount of Rs.4200 crores. Banks and Financial Institutions including SIDBI also had made investments in the equity of such NBFCs.”

The issues relating to MFIs did not come to surface suddenly. The State Level Bankers’ Committee Reports during the past few years have been indicating NPAs growing the SHG –Bank Linkage programme and MFIs charging usurious rates in 2006. The State Government had a knee-jerk reaction in promulgating “Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance, 2010 on 15th October 2010 that subsequently became an Act.

SBL programme implemented by NABARD since 1994 with the involvement of public sector banks, cooperative and rural banks creditably has no record of suicides or even extortion in recovery process. Capacity building of groups and building group dynamics saw several innovations that resulted in some of the groups taking up agricultural marketing activity in the villages. (For example, in Nizamabad District the SHGs collected maize crop of 3lakh tons and sold at remunerative prices for the farmers and good margins for themselves. There are also built-in insurance mechanisms as well. Andhra Pradesh leads this movement.
There are private players like the Cooperative Development Foundation (CDF)and Centre for Collective Development (CCD) that built SHGs around the concept of small savings of the Women groups initially. The group saves in small sums and the individual members’ needs are met out of the savings: the savings receive interest at the rate decided by the group ( this is around 12%p.a) and the credit for any purpose that the members approve would be charged at 15% and they also build ‘Abhaya Nidhi’ an insurance fund for any untoward calamity to any member. CDF has built a women’s dairy while the CCD has built even Oil Mill with the financial support of NCDC. Most of these groups have a livelihood support programme behind them.


While the AP Government sounded the alarm with the ordinance that was really not necessary as the existing laws would take adequate care of punishing the usurious lenders on one hand and violent extortionists on the other, the MFIs have been disrobed. The question that still haunts is whether the registration of MFIs would help the cause of the poor. I doubt.

Why Suicides in AP alone?

Whether it is farmers or micro credit borrowers, failure in repayment of loans is the root cause of suicides and these have been occurring mostly in Andhra Pradesh in spite of several measures taken by both the Central Government (separate package of loan waiver announced; interest subvention announced in the farm sector in 2007-08). This is because of the enlarged inadequacies of credit-related infrastructure for institutional lenders to move aggressively on one hand and social divide on the other. All the schemes announced by the Government have built-in rent seeking opportunities for the bureaucracy and politicians with only a portion of the schemes reaching the poor. Secondly, in the villages, there is a clear rich-poor divide on caste considerations. The sufferings on any account whatsoever are mostly unattended. The neighbours expect only the Government to take care of them. Andhra Pradesh is one of those few States declaring reduction of poverty to a mere 16% in the backdrop of state economy growing at a steady 6% and above at the beginning of this century. At the same time there is uneven distribution, rampant corruption and heavy politicization of any and all schemes that are meant to reach the poor.

MFI could make a difference in this scenario as there were no strings attached to the loans and the loans were being available in bigger slices than the SBLs at their door step. Little did they realize that the no-strings loans had ropes around their necks running like a computer programme.

Lending money has to be distinguished from extending credit.

Under what parameters, the Banks were doing bulk lending amounting to hundreds of crores to unregulated MFIs? Whether they were lending against any collateral security offered by MFIs or whether their lending to MFIs has any relation to relative net worth of MFIs? What are the precautions taken by Banks to ensure against misuse of funds by MFIs or protect the public money in case of default by MFIs? When the Banks knew pretty well that this is for re-lending, why did not impose conditions on its use and cost of operation? Every lender imposes such covenants in their loan agreements. To blame it on MFIs is unfair. They only took advantage of whatever that was offered to them.

Whether MFIs were lending to first time borrowers or are they double financing the existing borrowers of other banks or other MFIs? Are they informing other Banks/MFIs in case of double financing? Are they ensuring end-use of funds? Are they financing any income-generating activities or consumption activities?

Whether staff of MFIs has any credit assessment skills? Whether MFIs or their staff is doing a risk assessment of the borrower? Whether MFIs are educating the borrowers about the conditions and stiff repayment obligations?

Where is the need for MFIs to target the SHG-Bank Linkage beneficiaries? Whether the staff of MFIs was given stiff targets of lending and recovery in order to boost their turnover? Were these staff adequately trained and sensitized about the rural dynamics? Were the staff paid salaries or given incentives on targets? How did the staff recruitment take place and what are the HR practices of MFIs? Why did their staff behave with borrowers in inhuman manner as alleged? Did not such behaviour warrant the application of other Laws in the country to tackle it?

A joint fact-finding study on microfinance conducted by Reserve Bank and a few major banks made the following observations as mentioned in the RBI Master Circular RBI/ 2010-11/52 RPCD. FID. BC.No. 05 /12.01.001/ 20010-11 July 1, 2010):
i. “Some of the microfinance institutions (MFIs) financed by banks or acting as their intermediaries/partners appear to be focusing on relatively better banked areas, including areas covered by the SHG-Bank linkage programme. Competing MFIs were operating in the same area, and trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households.
ii. Many MFIs supported by banks were not engaging themselves in capacity building and empowerment of the groups to the desired extent. The MFIs were disbursing loans to the newly formed groups within 10-15 days of their formation, in contrast to the practice obtaining in the SHG - Bank linkage programme which takes about 6-7 months for group formation / nurturing / handholding. As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs.
iii. Banks, as principal financiers of MFIs, do not appear to be engaging them with regard to their systems, practices and lending policies with a view to ensuring better transparency and adherence to best practices. In many cases, no review of MFI operations was undertaken after sanctioning the credit facility.”
These findings were brought to the notice of the banks to enable them to take necessary corrective action where required. If lending to the poor is cost-intensive, and such lending is very necessary in the drive to financial inclusion agenda, the cost needs subvention from either the Financial Inclusion Fund or the Micro Finance Fund and the delivery mechanism for such subvention has to be worked out carefully.
This circular and the entire episode with consequences reflect that the RBI has to bring them into financial regulatory regime as they are also part of the overall financial stability mechanism. NABARD because of its one and half decades of active presence in the micro finance sector through SBL programme, may have acquired the capabilities to regulate the system. But it cannot be a player and regulator and therefore, it may hive off this activity as an independent arm and then take over regulatory responsibility if the RBI were to continue to feel that it is not equipped adequately to handle this regulatory responsibility. Micro Finance Regulation and Development Bill 2007 have been well debated and its ineffectiveness has been articulated in full measure. The Bill drafted by NABARD with the assistance of SADHAN, deserves redrafting as it does not respect either financial regulation or legal fundamentals.
The MFIs’ taking credit for reaching those poor where the institutional credit mechanisms thus far failed to reach has some justification. But the route they chose became questionable. If, as they aver, the poor get the money at the door step and they were able to get a multiplier out of it and therefore the MFIs are reasonable in expecting a major slice of it, is patently absurd. The poor, if they start earning more than what their existing style of living demanded, should be enabled to save a good pie for the future and for better insurance and protection of the next generation. The MFIs that did not create livelihood opportunities, and barricaded sustainability have no license to squander public money in the name of equity. Growth with equity should also be matched with social justice and this is instantaneously absent in the present MFI approach.

Malegam Committee in its wisdom suggested an array of interventions by the regulator and couple of days before its release, the RBI asked “banks to extend the regulatory asset classification benefit to ‘standard’ restructured MFI accounts, even if they were not fully secured. This relaxation banked on environmental factors. The RBI felt that the huge lending to Micro Finance Sector by the commercial banks of all hues, that got classified as priority sector lending because of its earlier classificatory instruction, needed a reprieve failing which the Banks had to provide additional capital. Banks used to resort to Consortium lending to distribute the risks among the group of banks whether small or big and to have an internal discipline in portfolio management. Somehow, the Banks felt that they can give a go-by to this practice even when more than Rs.2000 crores were to be lent to a single NBFC dealing with micro finance because it was lending to priority sector!! The fact that did not attract the attention of the Malegam Committee as well, give the impression that the Banks have lent prudently to the MFIs but landed up in NPAs and therefore required the reprieve.

The Committee’s postulates and assumptions of the nature of clientele were the right triggers of the Micro finance activity. If the RBI were to regulate the NBFCs why did it fail in the first place to distance itself and in the second place giving a modicum of credibility in the name of priority sector? Third, why did it turn a Nelson’s eye when the issues of high rates of interest were repeatedly being brought to its notice for the past three years? There is partial interest rate regulation concerning agriculture and SME sector at 7 percent per annum for the farmer and 9 percent for a section in the later. Would it require the Committee to suggest regulatory interest regime for this sector? There were a few studies which went into the cost of lending in the Micro Finance Sector suggesting comfortable optimum lending rate in the range of 23-24% per annum, as the clientele of the MFIs needed to be cultured into borrowing discipline on one side and to put them into livelihood projects instead of consumptive behaviour on the other. New form of business organization with a clumsy definition in the shape of NBFC-MFI is unnecessary. The existing regulatory rigour if properly administered on the NBFCs would be adequate.

The Committee said that the primary borrowers should be with an income cap of Rs.50000 per annum. If such a cap is linked to inflation index it would have made sense. A dynamic concept has been given a static field. Credit risk assessment and management is the basic job of the lender. The Committee could have specifically narrowed down on the excesses and conflicts of interest and suggested remedies to such practices. Policing is not the job of the financial regulator. It falls within the realm of the Government.

While the AP Government acted in a huff putting an imperfect legislation in its ambivalent situation and in its anxiety to demonstrate that the Government existed and it was capable of preventing nefarious recovery practices driving people to commit suicides. In fact, the existing laws were adequate to deal with such situations. Well, it had little political options at that moment. Malegam Committee excepting to suggest transparency in terms and conditions of sanction of loans under joint liability group approach and relaxed recovery periods – at fortnightly or monthly intervals etc., did not come up with stringent regulatory action on the NBFC-MFIs should they go beyond such practice. The margin cap of 10-12 percent with an outstanding of Rs.100cr at the beginning and end of the year does not really help. It could have come up with the suggestion that each NBFC dealing with micro credit should invest in livelihood projects to the extent of at least 30-40 percent of its portfolio.

Uniform repayment programme at fortnightly or monthly intervals is not going to impart discipline to the lending unless it is linked to the income accruing into the hands of the borrower. For example, take the case of the fishermen. When they come to the shore with the catch once in a week or ten days, they sell it away at the jetty. The fishermen would be too eager to repay but only at that point of time. It would almost be impossible to recover later. The vegetable vendors likewise contracting to buy once in a week could also be happy to repay once in a week while many others find it difficult to adhere to such weekly repayments. The suggestions of the Committee reflect inadequate appreciation of the way the poor respond to credit in various situations.

The Committee failed to address the issue of insurance of the JLG and SHG groups that required appropriate cover both for life and their earnings. The Committee’s Report left more questions than answers. In fine, very few of the recent RBI reports evoked such disappointment as this and the RBI should make up for the shortfalls in the Report.
------------------------------------------------------------------------------------------------------------*The author is an Economist and Member of the Expert Committee on Cooperative Banking, Government of Andhra Pradesh. The views expressed are personal.

Friday, January 14, 2011


B. Yerram Raju*
“Not all the perfumes of Arabia will sweeten this little hand” (Shakespeare from ‘Meckbeth’)
The rate cuts of 2010 from the RBI did not influence the prices of food articles in particular and others in general, with the food inflation at the alarming level of more than 18%. Rampant corruption surfaced in nooks and corners of the economy. Recently the stories of forged notes coming into circulation via Pakistan, Bangladesh, West Bengal have also come to light. Rs 1000, Rs 500 notes have become the minimum denominations in circulation. All bank counters can stand evidence to this phenomenon. Several ACB raids revealed that the cash stored and seized in raids were mostly in Rs.1000denomination currency or Rs.500 currency. It is not certainly the 8.5% growth of economy that is responsible for this.
This will certainly bring down the inflationary pressure as it will flush out excess money in circulation. For a moment, this may foment the bear hug that has already started, for a few more days and market correction may in fact be facilitated.

This measure would not certainly affect the small and marginal as also tenant farmers, wage earners, salaried class and the aam admi in general. The rich might regret for the stack. Extraordinary situations require extraordinary solutions.

బుద్గేట్ ౨౦౧౧-12


B. Yerram Raju*

The FM’s biggest challenge for formulating the 2011-12 Budget is not so much the revenue and expenditure projections as the direction in the wake of highest food inflation rocking the growth boat that has been the cynosure of the global investors. Agriculture, though reducing in its overall share of GDP, is still the prime mover of the economy. The rising food inflation, the unabating suicides of farmers in a few important patches of the economy, lagging productivity despite a quinquennial growth in overall production of most of the important crops have pointed out more the inefficient distribution channels than the supply side issues. Government could not respond adequately to these issues well in time. Elections to two important States are on the anvil. Congress governments in States, particularly, Andhra Pradesh is threatening the political stability not to speak of all pervading corruption. The focus of my article is therefore on Agriculture sector Budget that requires special dispensation.

Sector Analysis:
Based on the Mid Term Appraisal of the XI Five Year Plan, agriculture sector has only recorded the most unimpressive growth.

Growth in GDP at factor cost 1999-2000 prices
Eleventh Plan Agriculture and Total economy
Allied Sectors

2007-08 4.7 9.2
2008-09 1.6 6.7
2009-10 R E 0.2 7.4
Triennium 2009-10
over Triennium 2004-05 3.4 8.6
Eleventh Plan
Average (2007-10) 2.2 7.7
The slow down has been attributed to a number of factors that included the lack of a breakthrough in technology of major crops ; low replacement rate of seeds/varieties; slow growth or stagnation in area under irrigation and fertiliser use, decline in power supply to agriculture, and slowdown in diversification. It was assumed that the large gap between attainable level of productivity achieved in frontline demonstration plots and actual productivity at farm level offers a ready option to raise productivity and production by pushing use of quality seed, fertiliser, and water (irrigation). XI Plan only made only pious expressions to reverse these trends. World Bank in its Report (IEG 2010) reaffirmed that sustainable agricultural growth is critical to poverty reduction. It has provided enough data from the Brazil, China and India to show that a percentage growth in agriculture in South Asia led to 0.48% reduction in the number of poor in those nations.

In the wake of rising labour costs that today account for 30-40 percent of the total factor costs in agriculture, farmers are increasingly resorting to mechanization and this has been reflected in the number of threshers, weedicides, harvesters and harvester-combines sold during the year. Technology’s importance is realized more today than ever. Therefore, the direction in which the Budget should move is in the areas of assured input supplies, investments in Research and Development, incentive for farmers to stay on the farms and removal of hardships and stress and relief from the calamities when confronted. It has been proved that the farmers have not benefited to the expected degree through the Loan write-offs and increased flow of short term institutional credit. Delivery mechanisms of all the announced incentive packages leave much to be desired.

Central Plan outlay for Agriculture and allied sectors
(Rs. in crore)
Total outlay Agri sector share
X Plan (2002-07) Rs 9,45,328.00 Rs.26,108.00 (2.4 per cent)
XI Plan (2007-12) Rs. 21,56,571.00 Rs.50,924.00 (2.4 per cent)

The allocation to agriculture and allied sectors in Centre’s Plan has been substantially increased from Rs. 21,068 crore in the Tenth Plan to Rs. 50,924 crore in the Eleventh Plan while retaining the over all share undisturbed.

As an astute and the most experienced Finance Minister he should be looking for some out of the box solutions as extraordinary problems require extraordinary solutions.
One cannot keep on asking for writing off credit and yet ask for more credit to flow. This is responsible for driving the farmers to private money lenders who lent at usurious rates and caused the suicides. Instead, what I would suggest is a Natural Calamity Relief Fund, Farmer Innovation Fund, Farming Technology Fund and Market Stabilisation Fund.
Investment Credit in the farm sector has been making a very slow movement and this has to be accelerated so that more funds would flow for investments in Research and Technology, organic farming, bio-technology in agriculture, soil regeneration, efficient water management and the like. Working capital loans in farm sector that the FM has been generously asking for from the Banks have a knack of camouflaging and do not result in asset restructuring and improving productivity although they should continue to flow consistent with the investment credit. Therefore, I would venture to suggest the following:
Institutional Loans to be made available at 4% p.a as suggested by Dr Swaminathan. The difference in interest which the Banks expect from such lending and this 4% should come from Interest Compensation Fund flowing as budgetary support from both the Center and State Governments in 50:50 share.
Redirect the Rural Infrastructure Development Fund to move into one of the four funds I suggested above. Each of these Funds should be managed by NABARD with State Specific allocations providing for flexibility in drawal depending on the situation arising in the respective State and the Fund MANAGMENT Committee of NABARD should have Farmer Association Representative and at least Two Economists of repute from the State to be members. The Committees should be set up at the State level.

I am not venturing to suggest the size of the funds as this would depend upon FM’s overall resource position agenda. It is important that the country should move away from the traditional way of allocations to this important sector.

*The Author is an Economist and Member of the Expert Committee on Cooperative Banking, Government of Andhra Pradesh. The Views are personal. Can be reached at