Why bank on banks?

Ahead of the budget, the ministry of finance has been unusually proactive, pushing out a policy announcement in time for the kharif sowing. Doubling the flow of agricultural credit to farmers is a good cause. Farmers, who have to depend on money lenders and face high interest rates to get credit for agricultural activities, face difficult times in case of drought. While industry routinely gets loans restructured, farmers have, until now, not got this privilege. On Friday, Union Finance Minister P. Chidambaram announced a scheme which is meant to increase the flow of credit to farmers. Banks have been encouraged to lend to farmers, meet realistic credit needs, undertake debt restructuring, take up new investment projects in the area of horticulture, irrigation, organic-farming, and so on. All this is to be done in accordance with prudential norms and guidelines laid down by RBI/NABARD. A positive feature of the announcement is that, unlike a number of previous schemes, a loan mela or a write-off has not been announced.

The most worrying feature of this announcement, however, is the underlying mindset. It betrays a finance ministry that believes that government owns banks and can direct them to lend to whosoever the government wishes. This is wrong. Governments should not dip into the pockets of banks in order to meet government goals. Banks should not have to pay for the political promises of the ruling party. Banks are now to be given flexibility to grant a one-time settlement to small and marginal farmers who have become ineligible for fresh credit from lending institutions. The government’s programme of helping farmers who have been affected by drought and are consequently unable to repay their loans is certainly noble. But this money should come directly from the budget instead of from the banking system. In fact, if this were packaged as a specific drought-relief programme, then it would be better targeted — as compared with tampering with banking rules, which will be misused by farmers all across the country (and not just in drought-hit areas).

This begs the question of the myriad yojanas that currently exist. There is a gigantic government apparatus engaging in all kinds of interventions into agriculture. What are the parameters and objectives of these schemes? Why should the government need to dip into the resources of banks, given that there are so many schemes already in place? Resources for drought relief should come from these schemes, and not from banks.