SUBSIDZED CREDIT

TO

MICROCREDIT
Progress of Rural Banking:
2006 saw the sharpest drop, with 1,503 branches closing their operations at a rate of one every six hours, on an average.

Redefinition:
Priority sector lending now includes advances to newlycreated infrastructure funds, to non-banking finance companies for on-lending to smaller units, and to the food processing industry. Loans to multinationals like Pepsi, Kelloggs, Hindustan Lever and Con Agra now count as priority sector advances in the books of commercial banks. More recently, loans to cold storage units, irrespective of location, have been included in the priority sector.
Chandrasekhar and Ray(2004) point to the growing presence of foreign banks in India, their direct presence and their indirect presence through the purchase of shares in existing private banks. They did not lend to rural areas or agriculture.

Pallavi Chavan (2004) has examined the growth and regional distribution of rural banking over the period 1975-2002. The gains were reversed in the 1990s: cutbacks in rural bank branches and in rural credit-deposit ratios were steepest in the eastern and north-eastern states of India.

REGIONAL RURAL BANKS

Most RRBs were making losses. Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD 1981): The losses incurred by a RRBs should be made good annually

Kelkar Committee (1984):

Small and uneconomic RRBs should be merged in the interest of economic viability.
Khusro Committee (1989):

The only option was to merge the RRBs with the sponsoring banks. The objective of serving the weaker sections effectively could be achieved only by self-sustaining credit institutions.
Bhandari Committee (1994): Greater devolution of decision-making powers to the Boards of RRBs in the matters of business development and staff matters.

Thingalaya Committee (1997):

Very weak RRBs should be viewed separately and possibility of their liquidation be recognized.They might be merged with neighbouring RRBs. Vyas Committee (2001) : Sponsoring bank should ensure necessary autonomy for RRBs in their credit and other portfolio management system. Chalapathy Rao Committee (2003): The entire system of RRBs may be consolidated while retaining the advantages of regional character of these institutions. As part of the process, some sponsor banks may be eased out.

The Purwar Committee (2004): The amalgamation of RRBs on regional basis into six commercial banks- one each for the Northern, Southern, Eastern, Western, Central and NorthEastern Regions. Thus one finds that a host of options have been suggested starting with vertical merger with sponsor banks, horizontal merger amongst RRBs operating in a particular region to liquidation by different committees that have gone into the issue of financial viability and restructuring strategies for the RRBs. The Sardesai Committee (2005): To improve the operational viability of RRBs and take advantage of the economies of scale, the route of merger/ amalgamation of RRBs may be considered taking into account the views of the various stakeholders.

The Committee was of the view that merging a RRB with its sponsor bank would go against the very spirit of setting up of RRBs as local entities and for providing credit primarily to weaker sections.

The All India Regional Rural Bank Officers Federation (AIRRBOF) firmly believes that in todays scene of commercialization, even for Rural Banking,

it the only option left for the government to merge the RRBs with mainstream Public Sector Banks. This would be the only viable restructuring exercise for the RRBS.

As a result of the amalgamation, the number of RRBs was reduced from 196 to 96. RRBs covered 535 out of the 605 districts in the country.

In September 2006, the government of India had set up a Task Force under the Chairmanship of K.G. Karmakar on empowering the Boards of RRBs for operational efficiency. The recommendations cover areas relating to HR, resource base of RRBs, investment avenues and the like.

SUBSIDIZED CREDIT:

In 1972, the Differential Rate of Interest (DRI) scheme was introduced for providing cheaper credit up to Rs.6,500 per beneficiary at four per cent interest rate per annum to the weaker sections of the society. Outstanding credit under DRI scheme should not be less than one percent of the total 2007, The maximum loan amount limit has been raised to Rs13,000 and the limit for housing loan has been raised to Rs.20,000 per borrower. In 1996, the private sector commercial banks falling short of meeting priority sector lending targets of 40 percent of net bank credit were required to deposit fifty per cent of the shortfall with NABARD/SIDBI for a period of one year at interest rate of 8 per cent per annum. Private sector banks which failed to meet priority sector lending targets were given another option to deposit 50 per cent of the shortfall with NABARD /SIDBI for a period of five years at an interest rate of 11.5 percent per annum.

The government of India has introduced a plethora of capital based subsidy programs linked with bank credit, such as the Prime Minister Rozgar Yojana (PMRY), Swarbahayanthi Grameen Swarozgar Yojana (SGSY), Swarna Jayanthi Shahari Rozgar Yojana (SJSRY), and the like.

The RBI has proposed in its revised draft guidelines on priority sector lending to impose penalties on banks for non-achievement of priority sector targets and sub-targets.

The Union Government had announced 3% interest subsidy

Grameen Swarozgar Yojana (SGSY), scheme has been launched by the government by merging all the povertyalleviation programmes.The SGSY envisages routing credit preferably through the Self-Help Group (SHG) conduit.

SUSTAINABLE MICROCREDIT 1. Microfinance programs become sustainable to institutions when net benefits to the community exceed total costs. Benefits accrue to the community when new businesses are successful and incomes increase. Microfinance fills a niche that banks do not always fill.

2. When a microfinance program becomes sustainable, net social benefits will be positive i.e. operating and capital costs will be exceeded by reduced welfare costs, increased household income and possible reductions in other, less quantifiable, social costs. 3. Further, a program might become financially sustainable, yet fail to achieve its original goal of reaching the poor. 4. The emphasis has shifted to loans without collateral, ensuring one hundred percent repayment capability, stress on savings, lending and regulating the group loans resulting in substantial reduction in the transaction cost for both the borrowers and the lenders.

5. A microcredit program that is to be sustainable must utilize or link up with some institutions. Linkages can be both horizontal and vertical. Horizontal linkages refer to partnerships with organizations at the same level-local or national. Vertical linkages refer to partnerships with organization at different levels, i.e., partnerships and /or contracts with government agencies or foundations. 6. Sustainability is not the same thing as financial viability. Few, if any, microfinance programs operate at a level where they do not need donor capital or services. Microfinance programs are not a substitute for capital markets.

7. If people are using the program and graduating to commercial sources of credit, then the program is successful, and sustainable.

The principles of self-help and microfinance thus hold the key to economic and socio-cultural freedom for Indias millions of poor, opening the gates of a hitherto untapped reservoir of human enterprise.

Start by doing whats necessary, then do whats possible, and suddenly you are doing the impossible.