Experts discuss RBI's recos on priority sector lending

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Experts discuss RBI's recos on priority sector lending

The RBI committee has come out with its recommendations on lending to priority sector. In an interview to CNBC-TV18, BA Prabhakar, CMD of Andhra Bank, MV Nair and N Seshadri, ED of Bank of India, discuss pros and cons of the recommendations.

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The RBI committee under the current Union Bank Chairman MV Nair has come out with its recommendations on lending to priority sector . It has reviewed the existing guidelines on lending to priority sector categories including agriculture, MSME and export.

In an interview to CNBC-TV18, BA Prabhakar, CMD of Andhra Bank , MV Nair and N Seshadri, ED of Bank of India , discuss pros and cons of the recommendations.

Meanwhile, they also speak about debt-ridden Kingfisher Airlines .

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying videos.

Q: One of the problems, which bankers point out, is that besides keeping that 40% of loans to be given to the priority sector, you have said that there should be a sub-category of 9% to small and marginal farmers. You have also added that the number of accounts should increase by 15% every year. Wouldn't this pose a very big burden on banks?

Nair: The committee's entire approach is to provide access to finance to those who are now excluded. If you really see the country's vision is to make available universal financial access through affirmative financial inclusion. There is financial inclusion which is progressing as planned.

If you look at the total number of farmers in the country, we have 90 million farmers, out of which small farmers and marginal farmers are 75 million. Those who have access to formal financial support is only 20%-22% of the 75 million. That is the reason we have recommended that there should be a focus on small farmers and marginal farmers. The whole idea is to make available access credit to these venerable groups. That is the major focus.

If you really look at next ten years, while we have substantial opportunity coming from the new generation customers in the metros, it is also expected from new bankable class to offer tremendous amount of opportunities to the bankers. So, today's investment is going to be a benefit for the future.

Pricing wise, we have no issue because it is linked to the base rate. What is important is whether there is risk involved in lending to the sector. So, we have recommended that the government should consider coming with the guarantee funds for small and marginal farmers.

Q: Would it not be a strain on your margin. After 50 years of nationalisation, banks have not really succeeded in getting to the last mile farmer. Now, if you are going to make this mandatory, immediately if this is passed into law, atleast for the next two-three years won't it impact margins?

Nair: Right now, banking sector has extended finance up to 6.32%. What we have recommended is to go up to 9% so that the larger numbers of the small and marginal farmers are included. Pricing wise, there is no restriction. If you can see the report, pricing is left to the bankers, bankers can take a call.

Q: What your views with regards to the draft recommendations in the current form? What sort of impact you think it's going to have on banking operations in terms of higher operating cost and possibly NPLs going forward?

Prabhakar: There are many positive recommendations in MV Nair Committee report. We are only looking at the targets set for small and marginal farmers and for micro enterprises.

As Mr Nair rightly pointed out we are very close to the numbers which they have recommended. Today, the lending to micro enterprises on an average basis is about 6.5%. The committee has recommended 7%. Similarly in small and marginal farmers, the industry average is 5.75%. The committee has recommended 9%. This has to be achieved by 2016. So, there is lot of time for banks to reach this target.

The only issue, which you raised, is very relevant that is the increase in number of beneficiary every year by 15%. I think that is something the banks will have to do it very carefully and seriously because presently the number that is being added is about 8-10%. So, we have to increase it to 15%. I think that is something the banks will have to do lot of work. As Mr Nair pointed out, with more and more financial inclusion being given a priority and with the help of business correspondence, we should be able to add that number.

As far as the profitability of banks is concerned, I think there are some positive recommendations that are not being highlighted. Now, in case of investments in Rural Infrastructure Development Fund (RIDF), wherever bank is short of priority sector targets, today it is done on a gross basis without netting off the earlier year investment. In fact the committee has recommended that it should be netted off. I think that is a big benefit to the banks.

The committee also has recommended setting up of a guarantee fund for lending to agriculturalists. I think these are all very positive things. As Mr Nair pointed out, the interest rates on these lending are freed now. So, the bank can charge risk based pricing to the beneficiaries.