Agri, MSME DFIs are failing to meet their objectives
The focus needs to shift from public sector banks to NABARD
and SIDBI, whose functions greatly differ from their intended role
When one sees high inflation, the RBI comes to mind. When
capital markets misbehave, SEBI is on the radar. When an insurance problem
surfaces, the IRDA comes into the picture. These are institutions with proven
credibility.
But when credit does not flow to agriculture or when farmers
commit suicide, why does NABARD (National Bank for Agriculture and Rural
Development) not come to mind? Why do farmers go to the government for a
resolution? Similarly, when MSMEs do not get credit on time or do not get the
services promised, why is SIDBI not under scanner? Why should the RBI still
have a department to resolve issues relating to agriculture and MSMEs and
prescribe priority sector boundaries, despite these other institutions?
Agricultural credit
NABARD, a statutory corporation, was set up in 1982, to take
up the work of the Agricultural Refinance and Development Corporation (or,
Agriculture Refinance Corporation, till 1970), as well as some functions of the
Agriculture Credit Department.
The NABARD Act was passed in 1981. Its preamble states that
it is: “An Act to establish a development bank...for providing and regulating
credit and other facilities for the promotion and development of agriculture
(micro-enterprises, small enterprises and medium enterprises, cottage and
village industries, handlooms), handicrafts and other rural crafts and other
allied economic activities in rural areas with a view to promoting integrated
rural development and securing prosperity of rural areas, and for matters
connected therewith or incidental thereto.”
NABARD is a development finance institution (DFI)
established under the statute to serve the purpose of providing and regulating
credit and other facilities for the promotion and development of agriculture.
It started regulating cooperative credit, but that space was ceded to
commercial banks. It also started with regulating RRBs, but most of them merged
into larger entities and RRB branches are now mostly seen in urban and metro
centres.
When the statute provided for regulation of credit to
agriculture, why did the RBI continue to hold the reins? Is it because of lack
of confidence in NABARD, or a reluctance to cede control?
The Rural Infrastructure Development Fund is administered by
NABARD. Why should NABARD fund States for infrastructure projects, and in the
bargain became a banker for the State — not for agriculture and allied
activities, rural and cottage industries? It undertakes more treasury business
(pure financial operations) than refinancing of cooperative banks and RRBs at
very soft rates, and through them, lends to the farmers of all hues. There has
been a compromise of objectives, with full concurrence of both the RBI and the
government. NABARD’s income comes more from investments than refinancing or
development projects.
Commercial lending
Let us see the other DFI — set up under a separate statute
in 1989 — the Small Industries Development Bank of India, or SIDBI. There are
several Centrally-supported ‘funds’ for the development of small enterprises.
But there is no review in the public domain as to how these funds are
performing.
The Centre established SIDBI Venture Capital and the
ventures funded were of the real estate sector and MFIs. It has no credible
record of financing and promoting micro and small manufacturing enterprises or
clusters. SIDBI started direct lending sparsely, with a minimum of ₹50
lakh. It did not consider, during the first decade financing, SME marketing
activity as a term lending portfolio. Manufacturing enterprises did not get
venture capital at a lower cost than the normal venture capital funds.
Commercial objectives continue to govern its functioning.
Its regional offices are so autonomous that they do not even consider
responding to RBI guidelines. Most of SIDBI’s lending is through collateral
securities. It basks under sovereign protection to diversified activities.
Schemes such as MUDRA, CGTMSE, 59Minute Loan are all under
its umbrella, albeit indirectly. No one has questioned SIDBI’s way of
functioning in relation to the objectives spelt out in the statute: “An Act to
establish the Small Industries Development Bank of India as the principal
financial institution for the promotion, financing and development of industry
in the small-scale sector and to co-ordinate the functions of the institutions
engaged in the promotion, financing or developing industry in the small-scale
sector and for matters connected therewith or incidental thereto.”
Thus, both the DFIs targeting specific sectors are
non-performers in their supposedly dedicated domains. At a time when the
Finance Minister is keen on bringing about institutional reforms, she should
shift her antenna from mergers to these two DFIs.
The writer is an economist and risk management specialist.
Views are personal
