'Hope is a waking dream' for rural banking

Dr. Boidurjo Rick Mukhopadhyay

International Award-Winning Development and Management Economist. He can be reached at boidurjo@gmail.com

Prof Bibhas K Mukhopadhyay

Professor of Management, and author of the book 'India's Economy: Under a Tinsel still Tough'.

He can be reached at m.bibhas@gmail.com

Current trends reassure that the banking sector in India has been progressively marching ahead. Net interest margin of public sector banks is quite competitive. Technology has been transforming internal operational efficiency and profitability is going north. Though the recent performance levels may definitely be categorized as 'satisfactory', yet considering the changed circumstances - pandemic on top of a long list of various other things - a better performance is every one's desire. The various other things or laggards would be undercapitalized commercial banks, moderate customer service, an average cost-income ratio, low-level of credit-deposit ratio, problem ridden, cooperative banks, among others.

Evidently, there has been comparatively slower growth in institutional finances to the rural counterpart through commercial banks, credit cooperatives, RRBs and LDBs, particularly during the last few decades. This is mainly due to less supportive business environment and also due to – unfavorable and turbulent policy framework, high transaction costs and poor repayment performance leading to high proportion of NPAs to total assets, particularly of RRBs and SCARDBs. Debt forgiveness, which virtually eroded repayment and allowed defaulters to scot free with no deterrent reprimand as well as political interference, stood severely in the way.

Keeping pace with changing requirements

Time is ripe to ensure that the entire rural credit delivery system encompassing rural branches of commercial banks, cooperative credit institutions and RRBs should not be reduced to stagnation or rituals. With a view to reinforce the farm and non-farm credit delivery system, there is need to adopt innovative approaches – e.g., betterment of linking of Self-Help Groups (SHGs) and Non-Government Organizations (NGOs) with mainstream financial institutions, among others. In order to rejuvenate rural credit delivery system, the majorproblems facing the system, need to be tackled with more fiscal jurisprudence. The focus should be on strategies that are required for tackling issues such as sustainability and viability, operational efficiency, recovery performance, small farmer coverage and balanced sectoral and spatial development.

Recently, there have been moves to ensure better credit flow to rural productive sectors. Still: can it be denied that more than deserved growth is there in sectors like: housing, personal loans, commercial real estates, credit cards, which have been witnessing almost 100 per cent, credit growth? The need is there to ensure rebalancing the credit portfolios so that the productive sectors are not denied of adequate credit.

This, no doubt, could help foster the very growth of the economy and bring in high growth momentum. Side by side: credit migration is to be mitigated steadily while ensuring deposits growth inasmuch as sustaining a rural credit growth of 15 per cent the banks are to ensure that the deposits grow by at least 20 per cent.

It is a fact that to ensure stability on the liabilities side of business, banks are to focus on expanding retail deposits base. This obviously includes better absorption of deposits from rural and semi-urban regions of the country inasmuch as for the banks the real need is there to focus on small loans to the farm sector and small and medium enterprises and smaller liabilities since the large corporates have already disintermediated and have already begun to directly access the financial markets.

Rural sector has to grow speedily otherwise the 4 per cent growth in the farm sector would still remain a distant dream, not to speak of GDP growth by 5-6 per cent!

Accelerating the pace of financial inclusion:

Financial inclusion could definitely aid to these efforts - hats off to the recent efforts made by the banks and the policy encouragement by RBI. Inclusive growth is the current compulsion of a sound public policy. True, there has been a convergence in the business interest of the banking community in financial inclusion. Financial inclusion is to be treated as a business investment. Banks are to move to the masses as a natural process of financial inclusion - consolidating rural branches/ rural coverage, agri-lending, SHG bank linkages, social onus of banks, etc. among others.

Still, to bring the farmers under the ambit of financial inclusion the increasing role of commodity exchanges in the matter of providing forward market linkages and price discovery is being largely felt. This very process could succeed if banks and exchanges work together. Active market support providing is that what is urgently awaited. Side by side, banks and financial institutions which have been intervening in the Forex as well as in the stock markets now need to extend active participation in commodities market. Introducing specialized financial products and reach out to farm households with holdings of less than one hectare, for example, could definitely extend the outreach. The growth process should be widespread as well as sustained.

Mere opening of more SHGs does serve a little:

Bringing every part of the society into the organized banking fold is the real challenge. SHG-bank linkage process is just a good beginning, which, in turn, is to be continued in such a manner that it really becomes a revolution ensuring assets generation on a continuous and spontaneous basis.

There is no doubt that the SHG concept has been working well not only in India but also in even tiny States like Mali. SHGs need to graduate themselves from providing consumption/ agricultural credit to micro enterprises level economic activities in order to generate a higher income level - upgrading from papads and pickles to higher level of economic activities.

Rural bank branches should evolve a system that not only provide credit but also allow farmers to earn better. A credit-plus mechanism could help them repay the loans easily. No one can dwell better than banks on inclusive growth and as such the crucial need is there to percolate among the poor. A paradigm shift to allied activities – apiculture, viticulture, floriculture, shrimp farming, pisciculture, poultry and especially the dairy sector – is vitally required. Centre's support via higher support prices is also a prerequisite. It should not be forgotten that banks are one of the wheels of development - if other wheels do not move simultaneously (viz. rural electrification, marketing, storage, communication, technical consultancy, etc.) lower rate of growth would go on repeating just. MSP has to go up keeping in view the holistic trends. But the crucial need is also there to implement farm activation programmes as well bringing in more agricultural lands under cultivation / active farm land use.

Better credit flow is necessary but not sufficient:

Land use dimensions, in turn, call for a new look. Simply asking the banks to double the flow of credit to the agri-sector is necessary but not sufficient, obvious enough. The urgent necessity is there for deployment of more funds with better infrastructure support to rural farmers – which in fact is not happening in the real sense. Government's efforts are on, but techno-social-scientific updated approach is urgently awaited.

Rural marketing is different than the urban counterpart in practice and an overnight change in the former is better not to expect! An institution can optimize performance by ensuring that each of the three sides of the performance triangle - corporate culture, the task the individual must perform and the motivation / behavioral make up of their employees – undergoes cautious treading. It is a pure case of change management and as such banks need to focus on appropriate capacity building measures to equip their employees to handle advanced risk management systems especially in the context of rural banking.