Businessworld - What Rural Banking?

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What Rural Banking?

Loans to farmers turned out to be bad business; that is why banks now give only big loans to rural tycoons

ASHOK V. DESAI
1 Aug 2009

Last Monday was the 40th anniversary of the nationalization of banks. They were nationalized as part of a political vendetta. They were owned by industrialists, who were suspected of supporting the old guard of the old Congress; Indira Gandhi, who wanted to wrest control of it, deprived the industrialists of their banks and made them dependent on state patronage for credit. That is history; however discreditable it may be, it is best put behind and forgotten. But nationalized banks are the prime source of credit in the country; it is worth asking how well they are fulfilling their function.

The most sensational event of their 40th year was the writing off of Rs 60,000 crore of loans they had given to farmers. The loans would not have been written off if they had not turned bad; the lucky farmers had already stopped repaying them. What proportion of loans to farmers went sour? The government had maintained a studious silence. But Rs 1,11,000 crore of bank loans to farmers were outstanding at the end of March 2006; the amount at the end of March 2009 could not have exceeded Rs 1,80,000 crore. To this should be added the approximately Rs 60,000 crore of credit given by regional rural banks; the total agricultural loans could not have much exceeded Rs 2,40,000 crore. Of these, a quarter were written off; the non-performing asset (NPA) ratio for agricultural loans was something like 25 per cent. Even if minor lending institutions are included, the NPA ratio would not go below 20 per cent. This is the proportion of acknowledged bad debts. It does not mean that the remaining three-quarters are good. It only means that they had not gone bad according to the definition of bad debts laid down by the Reserve Bank of India (RBI); they may still go bad.

One still needs to ask how honest banks are in declaring loans non-performing. According to the RBI, the total NPAs of banks on 31 March 2006 were Rs 20,000 crore; by 2009, they could not have risen above Rs 40,000 crore. In 2009, they wrote off Rs 60,000 crore of loans to farmers alone; they could not have written them off unless the loans were bad. In other words, when their real bad debts were at least Rs 60,000 crore, they were not recognizing at least two-thirds of the bad debts. The loan waiver is conclusive proof that banks egregiously understate their bad loans. Their NPA ratio is supposed to be no higher than 1 per cent. This figure is a fiction of imagination; the bad debts could easily be 10 times as much.

It would, therefore, appear that the banks are being highly irresponsible: that they are borrowing money from depositors across the country and giving it to farmers in full knowledge that they will not get it back. But is it the banks that are irresponsible, or the political party that forces them to give the loans? Even before nationalization, the proportion of bank branches in rural areas was over a fifth. After nationalization, banks started opening more branches in villages; by the end of the 1980s, 58 per cent of the branches were in villages. But then, banks somehow sickened of opening rural branches; by now the proportion of rural branches is no more than two-fifths. Why did they go off the villages? Their experience that farmers do not repay loans could have been a factor.

In 1980, a quarter of banks’ deposit accounts were rural; now the proportion is something like 8 per cent. But that does not mean that they are collecting less money in villages; the proportion of rural deposits has gone up from 3 to 8 per cent. In other words, banks are now having fewer accounts with larger balances in villages. Maybe, farmers got rich; maybe, banks discourage poor depositors.

But the change in depositors is nothing compared to the change in borrowers. In 1980, a quarter of banks’ borrowers were in villages, but the credit to them was just a 20th of the total. In other words, an average loan to a villager was one-fifth the size of the overall average. By 2008, the proportion of rural borrowers had fallen to a 40th of the total, while the credit given to them had exceeded a 10th of the total. In other words, the average rural loan was at least four times the overall average loan! Again, maybe villagers had become rich; but more likely, banks concentrated on the rich fellows in villages who ran trucks and buses or did wholesale business.

It is interesting what statistics can tell you if you know what questions to ask of them. But you would never know. For I have asked questions that the perpetrators of nationalization would not want to know; they yield answers that the nationalists would find deeply unwelcome.

The author is Consultant Editor of Businessworld.

ashok dot desai at gmail dot com

(Businessworld Issue Dated 4-10 August 2009)