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A rural branch at Khulri, Madhya Pradesh. Photo courtesy: Dusyant Gadewal/Flickr

Rural and farm credit were totally neglected before the nationalisation of banks on 19th July 1969. The historic All India Rural Credit Survey carried out in 1954 showed that formal credit institutions provided less than 9% of credit needs in India. While, the moneylenders, traders and the rich landlords handled more than 75% of rural credit.

During the 1950s and 1960s, a way forward was possible through the co-operative societies. In fact, their share in rural credit rose to 20% in the year 1971 due to policies that encouraged co-operatives.

Today, India’s co-operative structure has over 13 crore members and 6 crore borrowers. There are 370 central Co-op banks with 14000 branches. There are around 1 lakh primary agricultural societies. The RBI has banned them from using the name ‘Bank.’ The Co-operatives are not encouraged any more. The RBI keeps fining them, announcing moratorium and closing them now and then. Today, their share in the total credit has dropped to 13%.

Punjab’s legendary scholar Malcolm Darling had once said “the Indian peasant is born in debt, lives in debt and dies in debt.”

Public ownership of banks makes a lot of difference to this situation. In 1950 the Rural Banking Enquiry Committee recommended opening about 274 branches whereas the Imperial Bank of India agreed for only 114 branches but actually opened only 63 branches in the 5 years since 1951!

Understanding the issue and the need of the country, the government nationalised the Imperial Bank of India and that’s how the State Bank of India was born on 1st July 1955.  It was given the target to open 400 more branches in 5 years, and SBI surpassed that number well before time. That is the real benefit of public ownership of a bank.

Let us have a look at the history.

With the objective to promote medium term and long term loans to industry and agriculture, the following steps were taken.

  • SBI was formed from Imperial Bank of India in 1955.
  • Insurance Sector was nationalised in 1955.
  • Industrial Finance Department was set up in RBI in 1957.
  • A credit guarantee scheme for small scale industries was started in 1960.
  • Industrial Credit and Investment Corporation was started in 1955.
  • Refinance Corporation was set up in 1958.
  • Industrial Development Bank of India and the Unit Trust of India were promoted in 1964.
  • RBI set up a National Industrial credit (long term operations fund from 1964-65)
  • Agriculture Refinance and Development Corporation was set up in 1975 out of the profit of RBI to support rural credit structure.

All this helped the farm sector, allied agriculture as well as the small and micro enterprises.

Three important studies were conducted in the year 1964. PC Mahalanobis Committee on the distribution of income and levels of living, which noted that the top 10% of the population had amassed as much as 40% income.

The Monopolies Enquiry Commission found, in the year 1984, that there was high concentration of economic power in over 85% of the Industries.

R.K. Hazari’s detailed report to the Planning Commission in the year 1967, noted that “so long as many of the credit institutions are under direct control/and or influence of big industry and unless the linked control of the industry and bank in the same hands is snapped by the nationalisation of banks, reducing concentration of economic power with a few is not possible.”

This was the background for nationalisation. The RBI prepared a comprehensive list of unbanked areas and circulated it to the banks. For every new branch in an already banked area, the bank had to open 3 branches in an unbanked area.

In order to provide low cost banking facilities to the poor, ‘Regional Rural Banks’ were created through RRBs Act 1976.  By 1991, there were 196 RRBs & with over 14000 predominantly rural branches in 476 districts with an average coverage of 3 villages per branch.

After 1991 policies changed and by 2021 only 43 RRBs were left.  They have been converted into commercial banks, reducing their focus on rural areas and priority sector. This is affecting rural credit, especially credit to the farmers and small and micro enterprises.

In the year 1992 the National Bank for Agriculture and Rural Development was started with a mandate for facilitating credit flow for agriculture, rural industries and all other related economic activities in the rural areas. Today, NABARD which was earlier owned by RBI is owned by GOI. Now, NABARD is brought under tax net, whereas up to 2007 it was not taxed. NABARD bonds which were priority bonds are not classified as priority from 2007 onwards. Today, NABARD is over burdened with work and at the same time its staff strength is steadily decreasing. It may also be privatised by this government.

According to 2011 censes, out of 481.7 million total workers, 118.7 million were cultivators and 144.3 million were agricultural labourers, which means 55% of total workers were employed in agriculture and allied sector.

As per the agriculture censes 2015-16, the small and marginal farmers (0.0-2.00 ha) constituted 86.21% and their share in the operated area was 47.34%, Indian agriculture broadly covers crops, livestock, forestry and fisheries. This sector is also a net exporter. The sector required credit very badly.

As per NAFIS report 2016-17, 72% of credit requirements of agriculture households are met through institutional sources and 28% through non-institutional resources. As per the PSL report 2015-16, only 41% of small and marginal farmers could be covered by the public and private banks.

Some states get 10% of total agricultural credit but some states only 0.5%.  In Bihar, Chhattisgarh, Jharkhand, West Bengal etc, the bank credit is not proportionate to their agricultural output.

RBI Internal Working Group on Agriculture Credit 2019 reveals the following:

  • In July 2012, PSL guidelines were changed by removing distinction between direct and indirect credit.  A sub-target of 8% out of the average net bank credit was to be given to small and marginal farmers.
  • As on March 2017, 79% of the agriculture credit was given by scheduled commercial banks, 15% by co-operative banks & societies, 5% by RRBs and 1% by microfinance institutions.
  • As on 2018-19, the MFIs have around 32 million clients and the loan portfolio is Rs.30 billion. The interest rate charge is from 19 to 24%.
  • As on 2018-19, small finance banks have given loans of Rs.179 billion to small and marginal farmers.

The result is today, the direct agriculture credit is down, even corporates are getting agriculture credit, more credit is given in the month of March which is not a crop sowing season and urban and metro branches have large agriculture credit instead of the rural branches.

As of Sept 2021, out of the total credit of Rs. 109.56 lakh crore only Rs.13.20 lakh crores which is 12.04% of the credit has gone to micro, small and medium enterprises.  Out of this, major share is to the medium enterprises. As per the MSME Ministry, India has 63.3 million MSMEs. Popular narratives suggest that only 6-10 million have formal access to credit, as per a report by Mint. There is a huge credit gap which can be addressed by the public sector banks, albeit, with adequate staff.

Unfortunately the government and its (now) subordinate RBI seem to be shifting the responsibility to the Non-Banking Financial Companies or Micro Finance Institutions which charge 24% interest or more, but the corporates get credit at 7.5% to 10% rate of interest.

We are returning to the pre-nationalisation period through the policies of this government.

For a long time, banks were prevented from giving loans to pawn brokers under the simple principle that you can’t lend the bank’s money to someone for further lending.  But now in the case of NBFCs, that’s exactly what is happening. How can the RBI permit this? Banks are being asked to use NBFCs for extending credit in the name of co-lending. In this process, they become brokers, not lenders. This is going to lead to huge problems. The US financial crisis was created by the housing finance institutions, where multiple lenders operated. The same will happen in India if this practice continues.

Privatisation of public sector banks is going to lead to a huge crisis. The modern day moneylenders– the corporates who have promoted NBFCs will have a field day.  Moneylenders will flourish. Lakhs of farmers, small businessmen, small traders, small and micro enterprises and women who manage millions of micro enterprises will not have access to credit. It is time to stop the privatisation of banks by any means.

Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation.

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