On September 4, the Reserve Bank of India (RBI) introduced changes in the norms for priority sector lending (PSL) with the stated objective of “enabling better credit penetration to credit-deficient areas, increase in lending to small and marginal farmers and boosting credit to renewable energy and health infrastructure.” Under PSL, the RBI mandates a certain percentage of a bank’s lendable resources to specified areas. The policy — a legacy of the socialist era — has led to blatant misuse and misappropriation of funds and is far from helping the most vulnerable groups and sectors for whom it is intended. It needs to go as today the banking network is capable of meeting credit needs of all, provided the sector is left to itself. However, faced with contraction in the Gross Domestic Product (GDP) growth by a whopping 23.9 per cent and credit growth at a low of 6.7 per cent during the first quarter (Q1) of the current financial year (FY), the RBI introduced changes in the norms for PSL. But what is the connection between PSL and growth?
For several decades, successive governments followed a policy of directing banking credit to specified sectors, which had remained neglected for long and needed the required push to catch up with the country’s growing economy. The RBI mandates that a certain percentage of a bank’s Adjusted Net Bank Credit (ANBC) or lendable resources be given for PSL. For commercial banks, including foreign banks, this is 40 per cent, while regional rural banks (RRBs) and small finance banks (SFBs) are required to allocate a whopping 75 per cent for PSL. Within the over 40 per cent limit, there are sub-limits; for instance, agriculture gets 18 per cent of the ANBC. Although the guidelines do not lay down any preferential rate of interest for PSLs per se, generally such loans are “cheaper” and “more accessible.” The chargeable rate of interest is as per the RBI’s directives and varies from sector to sector,
As per the RBI’s directive, a short-term crop loan of up to Rs 3,00,000 (for animal husbandry, dairy and fisheries farmers, this limit is Rs 2,00,000) is available at a subsidised interest rate of seven per cent; an additional incentive of three per cent is provided for prompt payment. The effective interest cost works out to only four per cent. To make it happen, the Union Government offers to banks interest subvention of two per cent per annum and prompt repayment incentive (PRI) of three per cent. This comes at a huge cost to the exchequer (during 2019-20, the Government spent Rs 18,000 crore). The banks, too, share a good portion of the cost as reimbursement given by the Centre does not fully cover the interest subsidy extended by them to farmers (on a total farm loan of about Rs 13,00,000 crore given during 2019-20, interest subvention at the rate of two per cent alone works out to about Rs 26,000 crore against a budgetary support of only Rs 18,000 crore. If we include PRI, the shortfall would be even higher). It is, therefore, natural to ask whether farmers are actually deriving the intended benefit?
According to a study by the RBI’s internal working group, in several States, the quantum of crop loan was found to be higher than the value of all agricultural inputs (in Andhra Pradesh, during 2015-2017, this was 7.5 times the value of agri-inputs). Considering that crop loans are taken mostly for buying agricultural inputs, when the value of the former exceeds the latter, it clearly points towards diversion of funds to non-farm uses. Even out of credit that flows to agriculture, a disproportionately high share is cornered by large farmers viz. those with farms over 10 hectares. During 2016-17, large farmers, who account for 0.6 per cent of the total number, got away with 41 per cent of the agri-credit. Semi-medium and medium farmers, owning between two-10 hectares (they are 13.2 per cent of all farmers) get bulk of the balance 59 per cent agri-credit. Small and marginal farmers with holdings up to two hectares (they are 86.2 per cent) get very little; in fact, nearly 41 per cent of them don’t even have access to banks.
Asset creation in agriculture holds the key to sustainable increase in the farmers’ income. Yet, the share of investment credit in total farm credit is only 25 per cent (down from 50 per cent in 2000). A big chunk of this also goes to medium and large farmers. According to the committee on “Status of Farmers’ Income: Strategies for Accelerated Growth,” that was set up to identify ways to double farmers’ income, small and marginal farmers finance 30.8 per cent and 52.1 per cent of their investment in assets through informal sources viz. moneylenders, traders and input dealers (albeit at high interest rate) and so on, as they don’t have access to banks. The irony is that large, medium and semi-medium farmers, having borrowed from banks at such low rates (four per cent), further lend this money to small and marginal farmers at a much higher rate, thereby making a huge profit. This is clearly a case of better off farmers and even non-farmers profiteering from the State largesse, riding piggyback on the most vulnerable for whom it is meant. The misuse is rampant even in other areas of PSL, say the micro, small and medium enterprises (MSMEs) sector, which gets 7.5 per cent of bank lending. Yet, our policy-makers continue with PSL and keep adding more and more sectors under its ambit and shuffling the limit under each. Thus, there are a host of other categories such as export, education, housing, health, social infrastructure, renewable energy and now, start-ups.
In September, the RBI increased the targets for small and marginal farmers from the existing eight per cent of the ANBC to 12 per cent, applicable from 2020-21 onward. It also increased credit limit for farmers producers organisations (FPOs) and farmers producers companies (FPCs) to Rs 2 crore per borrowing entity. The moot point here is when already the subsidised credit is not reaching where it ought to be reaching, what is the use of pouring more in? From FY 2021-22, a higher weightage of 125 per cent would be assigned to incremental priority sector credit in the identified districts, where the per capita PSL is less than Rs 6,000, and a lower weight of 90 per cent would be assigned for incremental priority sector credit in the identified districts, where the per capita PSL is more than Rs 25,000. This is intended to help 184 districts with low per capita PSL credit flow. Will things improve merely by assigning higher weightage?
To give a boost to renewable energy, the RBI has increased the limits for priority sector lending. Thus, loans up to Rs 30 crore per borrower for solar-based and biomass-based power generators, windmills, micro-hydel plants and so on will now be eligible for PSL (up from Rs 15 crore). Likewise, the limit for loan for building healthcare facilities, including those under Ayushman Bharat in Tier-II to Tier-VI centres, has been increased from Rs 5 crore per borrower to Rs 10 crore. Start-ups, which conform to the definition laid down by the Ministry of Commerce and are engaged in activities other than agriculture and MSMEs, can avail loans up to Rs 50 crore under the PSL. What is the sanctity of these limits? Is it the case that an entity which needs Rs 31 crore for setting up a solar-based plant won’t be eligible for PSL? Or, the application of a start-up needing a loan of Rs 51 crore will be rejected. This is bizarre. Putting in place such a system brings in a lot of discretion and gives the bank manager or officials a lot of room to manoeuvre. From the perspective of the borrower, every aspirant — irrespective of his/her scale of operation — will play with numbers to keep his/her borrowing proposal within the threshold. This is the surest invitation to nepotism and corruption.
To conclude, the extant highly convoluted system of “directed lending,” specifying targets for sectors in a typical top-down approach that keeps bank officials busy with target fulfillment and compliances, is pregnant with blatant misuse and misappropriation of funds. It is unlikely to serve the desired objective of helping the most vulnerable groups for whom it is intended. At the same time, it imposes a huge collateral damage. For instance, of the outstanding bank credit of about Rs 100,00,000 crore, when 40 per cent or Rs 40,00,000 crore is PSL given at a subsidised interest rate, banks are bound to charge more on the remaining 60 per cent to remain viable. This raises the cost of capital to all those enterprises. PSL needs to go. Banks should enjoy the freedom to lend and focus more on conducting due diligence, credit appraisal, hand-holding of borrowers, and monitoring fund use. For the most vulnerable, the Government may give interest subsidy but that should be directly credited to their bank accounts.
(The writer is a New Delhi-based policy analyst)