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.