By Sreekumar Raghavan
Every bank now talks of Financial Inclusion (FI) after the Reserve Bank of India directive two years ago to cater to the rural and inaccessible areas. The farming community now finds an eagerness on the part of banks to reach their door steps although some of the technology- initiatives such as smart cards are still in the pilot stages. Banks have now realized that reaching out to rural areas with `zero balance’ accounts makes sense since a huge market was subject to `financial exclusion’ despite the fact that bank nationalization was intended to help the farmers with the much needed credit which could not have been possible if financial institutions largely remained in private hands.
Just as in commodity and stock markets, the speculator was the subject of ridicule and envy, in rural areas the entire blame was on the cash rich money lenders who extracted every pound of flesh from the farmers driving them to suicide The obvious reason why money lenders survived is because banks found it difficult to set up operations in rural and inaccessible areas.
The Pigmy scheme, the forerunner of the present day financial inclusion initiative was launched in 1928 by Syndicate Bank. This was taken up later by other banks but did not succeed because of some operational problems. The agents who toured the rural areas in search of business did not often deposit the money collected in a timely manner and rolled it for other customers.
Is it enough for banks to go farmer’s door steps with enthusiasm if the product or service they offer is not suited to their requirements? It is a fact that some banks have turned innovative in this regard by offering loan products that help the farmers even liquidate their debts owed to money lenders.
But banks still have a long way to go in making their products tailor-made for the farmers. According to a recent analysis by R Bhaskaran, Indian Institute of Banking and Finance, the banks have a lot to learn from money lenders.The money lender charges a higher interest rate but allows the farmer to pay the interest in instalments while the principal can be repaid in lumpsum or instalments depending on the farmer’s convenience. The money lender is also not bothered if the money is not utilized for the purpose stated. There is also no processing fee or cost for loans taken from money lenders and the services are available at the farmer’s door steps.
This is not the case with banks. Most often payment is limited in quantum and repayment schedules are not often favourable to the farmers. If crop loans and term loans are availed, the farmer has to make repayment on both loans. In the event of crop failure there is no means to convert short term loan into medium term loans. The loan repayment schedule is not favourable to farmers because banks do not look at the debt-servicing capability.
More importantly, there is no coverage for price risk or weather risk. Bhaskaran suggests that loans for farmers should be tied to the commodity futures markets. “Imagine a farmer walking into a bank and getting a crop loan. If the banker were to offer him, along with a bank loan, a protection to ward off a downslide in the prices, in the form of a put option on his produce, till options are allowed a similar product could be offered as a forward cover based on the futures price prevailing on that day, the farmer will willingly pay a price for the cover. The options forward contract could be bundled into small contracts, banks retailing put option contracts, for the convenience of the farmer. Similarly the bank could offer a call option, again in the form of easy to understand forward cover, product to the grain merchant or the flour mill owner against a rise in the price. The bank could in turn take a protection in the futures market. Also weather derivatives10 will be a useful tool for the banks to manage NPA as weather derivative could be used as a proxy for hedging agriculture risk.”
The only downside to this proposal is that trading in options is not yet introduced in Indian commodity futures markets although it is primarily an OTC product.
Bhaskaran suggests that banks should allow farmers to repay the interest in instalments and principal at the convenience of the farmer and credit should be given for a longer term such as 10 years.
Banks could issue loans which are long term in tenor with single bullet repayment, with a provision for earlier repayments, as and when possible and only interest collected annually. In such a case it should be possible for the farmer to pay the interest annually and repay the loan or a portion of it whenever the income is sizeable. Microfinance institutions have already launched such flexibility in repayment.
In terms of understanding the farmer’s requirements, repaying capacity, problems in agriculture cash flow, weather risk, price risk and crop risk, it is still doubtful whether the banks have really understood the challenges facing the farmer that are quite different from what the service or manufacturing industry faces. Even the Kisan Credit Card schemes need to be further tailored to meet the farmers needs.
While the Committee Reports on financial inclusion led by such stalwarts as Dr C Rangarajan and several RBI generated reports point out mainly the need for banks to extend more agricultural credit, the challenge now is to understand the farmer. In this case, atleast, they should not just blame the money lender but also learn from them.
