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Priority-lending
The proposal to reduce the priority sector lending limit to 10 per cent of total advances, by a panel of the Indian Banks' Association, reflects the pressures on the banking system. Bankers have, in recent years, been instructed to concentrate on profitability and the target-oriented lending of the previous two decades has been summarily jettisoned. Yet these targets remain, and catering to agriculture and the small-scale sector not only means more risk for banks, but also involves maintaining a larger staff and a larger than required branch network. Small wonder that banks are peeved, and would like such directed lending to be limited to the minimum possible. But what may benefit the banks need not necessarily be optimal for society. If the priority sector limits are brought down drastically, it would result in severely curtailing lending to the sector. Small-scale industries, already down on their knees as a result of the industrial slowdown, would be asphyxiated by the lack of credit, and they would downtheir shutters, leading to social disruption on a massive scale. It needs to be remembered that one of the reasons for the spate of suicides of cotton farmers in Andhra Pradesh was the lack of credit from institutional sources, which led to the farmers getting into the clutches of rapacious moneylenders. Many countries have special schemes for the small scale sector, and the close links between Germany's regional banks and its Mittelstand are well-known. The problem is that our banks, with their primarily urban staff, are ill-equipped for taking care of rural banking needs. Instead of curtailing rural credit, we need to introspect on our credit delivery systems, and why loans given to groups with NGO help have recovery rates of over 90 per cent.The other answer to high priority sector NPAs lies in the second recommendation of the bankers' panel, which is to set up a debt-recovery tribunal for small loans, and give debt recovery powers to banks similar to those available to the state financial corporations.State financial corporations have the power to seize assets in case of default without going through the courts. These measures will help banks swiftly sell off assets to the highest bidder in case of default. Borrowers will be less cavalier with banks' money and much of the extra risk borne by lending to small industries will be taken care of. Of course, this will not be enough. Debt recovery tribunals have not worked for larger loans, with borrowers seeking injunctions from courts. At a more fundamental level, we need legal changes which make it easier for banks to recover their debts, and which ensure that assets locked up in litigation are reduced to a minimum.Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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