Post offices, cooperative banks the next Amul success story in banking?

Post offices, cooperative banks the next Amul success story in banking?

Online comments posted on October 24, 2013:

Cooperatives, including Urban Cooperative Banks whose role is covered in this article, have played a significant role not only in providing agricultural and rural credit, but in ensuring other linkages like inputs for farming and marketing avenues for products. As they were mainly operating in rural and semi-urban areas, it took longer time for this sector to access modern skills and technology. NABARD was established in 1982 with the specific mandate of supporting cooperatives and rural sector in general. Initial enthusiasm of NABARD faded away in the absence of legislative and administrative support from central and state governments and the institution had to satisfy itself by continuing to be an appendage of RBI doing some ‘safe’ business through established and credit-worthy cooperative banks and commercial banks. Legislative support in adequate measure for revitalizing the cooperatives which comprises state and district central cooperative banks and more importantly about a lakh primary agricultural credit societies is not forthcoming from central and state governments. At a time when the government and the regulatory and supervisory institutions are struggling to make a breakthrough in financial inclusion and improvement in productivity, if appropriately utilized, the already available infrastructure and membership of cooperatives will make their work much simpler.

GOI and RBI should at this stage take up a comprehensive review of the entire rural credit architecture for an overhaul. The changes necessary may include:

• Reviving the role of Rural Financial Institutions( RFIs) including rural and semi-urban branches of commercial banks, cooperatives and Regional Rural Banks which have strayed away from their mandated responsibilities,

• Identifying costs for financial intermediaries that cannot be factored into interest costs and specifying the agency which should meet them, if the activity has to remain bankable,

• Without going back to the abandoned ‘regulated interest rates regime’, working out and specifying broad bands within which ultimate lending rates should remain when bank funds are sourced for the purpose and

• Reducing the number of bypass routes allowed for priority sector lending to the minimum.

Such a review may be necessary at this stage, irrespective of who gets licenses for new commercial banks.

As public sector banks including State Bank of India and its associates, old private sector banks, new private sector banks, RRBs and cooperative banks have different approaches to resource mobilization, lending and profitability, varying capabilities in terms of outreach and expertise and different mandates from the stake-holders, each category of these institutions will have to be given resource mobilization and credit delivery tasks factoring in these structural and policy aspects.

The reorganization of the banking system may be further delayed for political reasons. As essential reforms cannot wait for a change in the political weather, in the medium term, GOI and RBI may consider the following steps:

• Redefine sub-sectors in the priority sector reckoning the changes that have taken place during the last two decades and realign the targets for sub-sectors. Beyond inclusion of a few additional activities as eligible for classification under priority sector or raising certain ceilings to factor in inflation impact, nothing much has happened in the recent past from this perspective.

• Ask banks to ensure that their rural, semi-urban, urban and metro branches realign their credit portfolios to meet local credit needs

• Instead of prescribing straight-jacket targets for lending to sub-sectors like agriculture, make necessary policy changes which will reflect the availability of expertise and outreach of each category of banks. E.g. If a bank has more branches in urban areas and cities and are able to lend more to microfinance, allow a set-off their disbursal to microfinance over and above a bench-mark against their target for lending to agriculture.

• Route all concessions and subsidies in interest rates through the banking channel and make the lending banker responsible to ensure that the ultimate borrower is charged a minimum interest of, say the rates paid on savings bank deposits by the bank.

(Excerpted from my article “Surmounting the Unsurmountable” published in The Global ANALYST, December 2013 which can be accessed from theglobalanalyst.co )

M G Warrier, Mumbai