FALLING CREDIT FOR AGRICULTURE AND MSEs – NOBODY’S CONCERN
B. YERRM RAJU*
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
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.