RBI may ask banks to raise direct farm credit to 12%

MUMBAI: Seeking a “comprehensive review� of fixation of targets for lending to priority sector, including agriculture, a Reserve Bank of India-constituted committee suggested that all public and private sector banks should increase their direct lending to agriculture to 12% of net bank credit within two years.
Fixing target on the basis of disbursements would not establish a link between total advances of a bank and lending to agriculture and hence it needs a comprehensive review. Till such a review is attempted, the existing target of 18% of net bank credit for lending to agriculture may continue, the VS Vyas Committee said in its report here.
On the action by banks, it said they should increase their direct lending to agriculture to 12% of net bank credit within two years and 13.5% within the next two years thereafter.
The indirect lending to agriculture may be reckoned to the extent of six per cent for computing the performance of banks under the 18% target during the first two years. Thereafter, the ceiling of 4.5% should apply.
“Although the target for lending to agriculture has not been achieved by most banks, the amount of outstanding lending to agriculture in absolute terms has increased continuously over years,� the committee noted.
Existing system of relating interest rates on deposits placed in RIDF inversely to shortfall in achieving the target provides adequate punitive measures, as banks with higher level of shortfall get lower rates of interest which would be less than their cost of funds, it said.
The Vyas Committee has recommended that credit to small and marginal farmers should be progressively raised to 40% of disbursements under the Special Agricultural Credit Plan (SACP) by the end of the 10th Plan period.
On new opportunities, it said there is a need for integration of investment credit and production credit. The banks can expand the flow of farm credit significantly if they consider total credit needs of cultivators.
Considering the new development in technologies and the need to adopt high quality inputs, the scales of finance need to be reviewed and revised to meet the credit needs of more capital intensive agricultural operations.
A number of conduits like school teachers, village postmaster and others in the village who are familiar with the borrowers, could be used for purveying credit without much paperwork. Franchising village post offices to route bank credit, as announced in the finance minister''s budget speech for the year ’03-04 will also go a long way in associating these agencies.
It also suggested that RBI may advise banks to waive margin or security requirements for agricultural loans up to Rs 50,000 and in case of agri-business and agri-clinics up to Rs 5 lakh.
The committee also called for a review of the lead bank scheme as it found that the former was not equipped adequately in terms of technical and non-technical manpower and other supportive facilities to be an effective arrangement.