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Gupta panel suggests liberalising agriculture loans

The high-level one-man committee of R V Gupta yesterday submitted its report to the Reserve Bank of India Governor Bimal Jalan, recommending far reaching changes in agriculture lending portfolios of Indian commercial banks.

The committee, set up by the Reserve Bank in December last year in the context of the priority accorded to the flow of bank credit to the agriculture sector, said that the bank should prepare special agricultural credit plans to accelerate the flow and improve the quality of lending. The RBI may indicate annually the expected increase in the flow of credit over the previous year rather than fixing a target based on outstanding credit.

Once the system is in place, the 18 per cent target would cease to have much relevance. While timeliness and adequacy of credit are critical in increasing the credit flow to agriculture, the committee said that commercial banks should be free to fix the rates of interest for loans of all amounts as had already been done in case of cooperatives and regional rural banks.

It also suggested that there was a need of substantial modification of the service area approach so as to provide borrowers a choice of banks as well as bankers a larger area of operation. The responsibility of a particular branch for the credit requirements for a specific village should, however, continue.

Accepting the report, the RBI governor forwarded the report to the Union government for examinations, a statement issued by the RBI in Bombay said.

Emphasising the need of delegating powers to branch-level bank employees, the report suggested doing away with the government stipulation for a compulsory rural posting and making it institutional need based, to be decided by the management of the banks.

It recommended to bring about the desired behavioural change in rural lending and to strengthen the sense of mission of bank staff through a package of incentives encompassing foreign exposure, training in prestigious institutions within the country, weightage in promotion, posting to a centre of choice, improvement in accommodation and educational facilities.

Bank branches should inform farmers transparently of the facilities availed as also the amount and periodicity of the various fees and charges levied by banks. The internal supervision system of banks should provide for visits to a few service area villages and during such visits, inspecting officers should convene open meetings of farmers to assess their problems and difficulties.

There is also an urgent need to rationalise the number of returns and a detailed exercise should immediately be undertaken by banks to reduce unnecessary paper work including elimination of ad hoc returns which very often require data already provided elsewhere.

The requirement to insure all assets purchased through bank loans is an imposition causing financial hardship to borrowers. The decision as to the kind of insurance to be taken should be left to the borrowers subject to statutory requirements. In order to give operational flexibility to the lending bankers, margin, security, and collateral requirements should be left to the discretion of the lending banker for loans over Rs 10,000.

The agreements and other covenants/documents to be completed are complicated and its simplification is recommended as has been done by some banks, such as the State Bank of India. All banks may examine their systems and make modifications within two months and report compliance to the Reserve Bank of India.

The focus of credit appraisal should be an evaluation of the income stream of the borrower and a comprehensive assessment of credit needs, taking into account track record, credibility, capability, as well as technical viability of the proposal.

To ensure quick disposal, at least 90 per cent of loan applications should be decided at the branch level. Banks may, therefore, review the position and suitably modify the powers of sanction delegated to the branch manager.

Short-term credit needs of the farmer should include all requirements directly and indirectly related to production, post-harvest and household expenses. Repayment capacity should be assessed on the basis of aggregate household income from all sources including crop production and ancillary activities. The credit facility should be extended through a composite cash credit limit. The limit may initially be provided for one year but over time extended for a longer period and brought to credit at least once a year. On credit balances, banks would pay interest and charge interest on the outstanding. Advances under such limits may be 'reckoned' as advances to agriculture within the definition of the priority sector.

In line with the change in approach towards appraisal of loan proposals for lending recommended by the committee, the forms accompanying the main application, especially, for investment credit, should be simplified and made more relevant for focussing on the income stream of the farmer. It is recommended that the Reserve Bank of India may appoint an expert group to finalise the new forms.

While some minor investments of a medium-term nature can be taken into account in the composite cash credit limit, investments of a major nature would still need a separate loan. In relation to the systems followed for term lending, the emphasis should be on whether in a given area an activity can be supported profitably, rather than obtaining abstract cash flows and other data based on projected technical parameters.

During cash rich periods, farmers have a propensity to invest in gold, land, implements, livestock or incur expenditure of a consumption nature. As a result they are vulnerable during times of adverse price fluctuations and natural calamities. To address the issue, farmers should be offered a liquid savings product with an appropriate return which should be inbuilt in the loan product so as to provide them a cushion during lean periods.

The system of adoption of scales of finance for short-term loans and unit cost of investment credit has led to distortions at the base level and introduced an element of rigidity in assessment of credit requirements. In view of the expertise developed by banks in financing agricultural operations and in order to give them flexibility to take care of variations in the requirements of borrowers, the fixing of the scale of finance/unit cost may be decided by the concerned banks.

The system of disbursing agricultural loans, partly in cash and partly in kind, has restricted the borrower's choice and given rise to undesirable practices including submission of false bills and receipts. In order to foster an environment of trust, banks may disburse loans for agricultural activities on a cash basis only and discontinue the practice of obtaining bills/receipts of inputs/ assets purchased.

Where banks are conversant with the track record of the borrowers, obtaining a no due certificate should be left to the discretion of the lending bankers.

Without recovery at acceptable levels, lending cannot be sustained. Specific recommendations made be the committee towards improving recoveries in agricultural lending include requesting state governments to set apart dedicated teams for recovery; improving the recovery climate through rurally oriented field publicity campaigns; and projecting the message that banks are willing to lend to viable borrowers and unless funds are recycled, lasting relationships cannot be forged through the credit mechanism. The accounting systems in banks need to focus on systems by which recovery is disaggregated by loan products, as well as by time so that it is possible for managers to determine which products are more viable and whether current recoveries are better than past dues.

Apart from these steps, the committee has recommended that tangible incentives be provided to farmers who are prompt in repayment. Banks should design appropriate incentive systems including interest benefit or rebate to borrowers who repay their dues promptly. Farmers who opt for a savings module linked to the loan product, may also be given a finer rate both on the loan as well as on the savings product.

Taking into account the procedural difficulties and the high cost of stamp duty connected with registering a mortgage in favour of a bank, state governments may initiate steps to abolish stamp duty on mortgage of agricultural land for obtaining loans from banks.

Unlike in urban areas, most land in rural areas is inherited and there are no title deeds. The original land records in the subdistrict office are similar to a share depository. The bank should, therefore, accept the pass book with an authenticated record of a farmer's land holding as valid title for purposes of an equitable mortgage.

In states where the Agricultural Credit Operations and Miscellaneous Provisions (Banks) Acts have been passed, bank loans should be secured through the mechanism of the declarations prescribed under this act. States which have not passed this legislation may consider doing so and in the interim states may issue administrative orders that declarations made by borrowers on the Talwar Committee model for charging their lands to banks may be noted in the revenue records so that banks can lend against the same.

The value of security taken should be commensurate with the size of the loan and the tendency to ask for additional collateral by way of guarantors where the land has already been mortgaged should be discouraged.

The non-farm sector has a large unutilised credit absorptive capacity. Rural households generally pursue a number of activities, both agricultural and non-agricultural, for supplementing their cash flow. These activities have modest working capital requirements and banks should design specific loan products for such activities by providing loans for short period up to three months, initially with weekly or fortnightly repayments. At the end of the period, repeat loans for higher amounts and for longer periods could be offered depending on the repayment behaviour with inbuilt incentives by way of interest rebate on prompt payment.

Self-help groups have proved effective intermediaries for the transmission of bank loans. Banks should give wide publicity to their preference for financing self-help groups, sensitise regional heads and branch managers to the potential for good lending through this route, and provide training to branch managers in assessing the potential of self-help groups and simplification of documents.

Small loans involve higher transaction and administrative costs. As a result, managers tend to look for larger loans where interest rates are deregulated, while banks seek to equalise the price differential by cross subsidisation. In effect, therefore, regulated rates of interest operate as a barrier to the sanction of small loans. As has already been done in the case of cooperatives and regional rural banks, commercial banks should be free to fix the rates of interest for loans of all amounts.

In the implementation of subsidy linked credit schemes, emphasis usually was on achievement of targets and the quality of lending as well as impact of such schemes was very poor. A thorough review of existing systems is recommended as subsidy linked lending has proved unsuccessful and needs to be replaced by an alternative method. The committee believes that the rural poor are viable and borrowers can be directly targetted by commercial banks through non-governmental organisation intermediation coupled with extended micro credit working capital facilities to the non-farm sector.

A review of Land Tenancy Acts may be undertaken so as to permit renting of land without the owner losing property rights.

The committee's overall mandate was to ascertain the constraints faced by commercial banks in increasing the flow of credit, introducing new products and services and simplifying the procedures and methods of working with a view to enabling rural borrowers to access adequate and timely credit from the commercial banking system. For this purpose, the committee was asked to visit select branches and regional offices of commercial banks, get a feedback from agriculturists, farmer-borrowers, agricultural scientists, extension workers, as well as field level staff.

UNI