In order to boost rural incomes, the government is considering allowing small farmers to take loans for animal husbandry and pisi culture at a lower interest rate of 4 per cent. There can be no argument that the small farmer and marginal sections of society need to be given loans at subsidised rates so that they can alleviate their economic condition and come out of grinding poverty.
But there are some obvious question marks on the implementation of such schemes. There are numerous examples from the past where similar schemes offered to marginalised sections for agriculture and self-employment, failed to make any meaningful impact on the life of those who require such loans. The schemes were either structurally flawed or if the structure was sound, their implementation was so poor that banks that participated in these schemes had to waive off loans a few years down the line. Thereafter the lenders developed cold feet and these schemes just became a number in the annual budget.
Which brings us to the basic question, whether state-owned banks have the required skill set to implement such plans, where the real needy borrower does not have even access to a bank branch. The answer is a resounding ‘No’. India’s state-owned banks don’t have the ability to disburse and collect payment of such programmes, as proved by their poor NPA record on rural loans. The other aspect that needs to be considered is that at a time when technology is changing the way banking is conducted and there is need to consolidate physical infrastructure of PSU banks, these lenders can scarcely be assigned the task of implementing such programmes, which involve moving deep into rural areas.
The solution therefore lies in using the structure and skill set of private micro finance companies, which have grown tremendously in the last 10 years to implement precisely the schemes that the government has in mind. These micro finance companies, which have grown in the remotest parts of the country, have the skill set, both to disburse and collect loans that are given to marginal sections of society.
The proof of their skill set lies in their low NPA numbers. They understand the social fabric of villages and hence are able to grow their loan book without collecting the burden of NPA. The biggest evidence that micro finance companies are the backbone of the country’s financial structure, comes from the fact that in order to grow into rural areas IndusInd bank, one of the finest private sector banks, had to take over Bharat Financial Inclusion, a micro finance company.
Another reason for outsourcing animal husbandry loans to micro finance companies is that their NPAs are very low, despite the fact that the interest rate they charge is higher as compared to normal banks. As far as the law for outsourcing is concerned, when some private banks can use the PSU banking network to meet their priority sector lending targets, then why cannot PSU banks use the network of micro finance companies to meet their loan targets for animal husbandry and pisi culture? Since the ticket size of these loans is going to be small, it would be possible only for the micro finance network to reach far and wide without increasing the cost of disbursement of these loans.