Chennai: Financial inclusion may be the buzzword of the times, but state-owned lenders that control 70% of India’s banking industry assets are falling far short of turning it into a reality for the nation’s poorest.
Public sector banks are required by the central bank to channel an amount equivalent to 1% of their aggregate advances of the previous fiscal year to the so-called weaker sections of society at a low interest rate of 4%, known as a differential rate of interest, or DRI.
In the last fiscal year, some banks failed to lend any money under the DRI sub-head, and the best performers managed to direct just 0.42%—less than half the target—of total advances to people eligible for the loans, according to Reserve Bank of India (RBI) data.
“It’s difficult to achieve this target as they are small-ticket loans,” said a public sector banker, who did not wish to be named. Banks are reluctant to push small loans because transaction costs are huge, at times 10% or even more of the loan amount.
People with an annual household income of Rs24,000 in cities and Rs18,000 in villages are eligible for the DRI loans, 40% of which are set aside for the scheduled castes and scheduled tribes, for which the Indian Constitution has made special provisions in education, jobs and bank loans.
Bank credit outstanding as of March 2007 was Rs19.29 trillion, and public sector banks accounted for close to 70% of the total advances.
But their loans under the DRI scheme stood at just Rs634.46 crore. Overall, they opened 260,000 accounts and only 0.06% of their advances in the previous year flowed into this segment. RBI does not impose any penalty on banks for failing to comply with the norm. Still, the performance this year may be better “as the eligibility criteria to apply for the loans under this scheme have been enhanced and so are the loan amounts,” the public sector banker said.
The average size of such loans was around Rs5,000 last fiscal year but in the current fiscal, it has doubled to Rs10,000 after the government raised the eligibility criteria.
Finance minister P. Chidambaram revised the eligibility criteria for availing such loans in the 2008-09 Budget.
Borrowers with an annual income of Rs18,000 in rural areas and Rs24,000 in urban areas can now get such loans, limited earlier to villagers with incomes of Rs6,400 and city-dwellers earning Rs7,200. This is the first revision in 22 years.
The Budget also brought the houses built under the Indira Awas Yojana, India’s flagship welfare housing programme, under the DRI scheme, and the loan ceiling was fixed at Rs20,000 per unit.
The DRI scheme was introduced in 1972 to benefit the poorest sections of society and engage them in economic activities for their betterment. “Though the effective rate of interest is very little in this scheme, people opted for subsidy-oriented schemes. Of course, bankers need to conduct financial counselling to explain the benefits of this scheme,” said M.S. Sundara Rajan, chairman and managing director of Chennai-based Indian Bank.
Prakash P. Mallya, chairman and managing director of Vijaya Bank, said, “The finance minister has asked to give attention on the scheme. We are in the process of fixing targets for our branches.”
The bank had lent 0.1% of the total advances (as in March 2007) during 2007-08. RBI data said that the bank had lent 0% under the DRI scheme during 2006-07.
Bank of Maharashtra, Punjab and Sind Bank and IDBI Bank Ltd were the other banks that had a score of 0% during fiscal 2007.
Bankers say that achieving the 1% target may still be difficult.
“It cannot happen overnight. It might take two-three years for us to achieve the targets,” said another public sector banker.
“It is not impossible. We are focusing on the scheme this year; we have started running quarterly campaigns to educate people about this scheme. We are targeting flower and vegetable vendors, cobblers,” said Sundara Rajan of Indian Bank.
According to RBI stipulations, 40% of a bank’s advances must flow to the so-called priority sector that includes small industries and 18% of this is meant for the agriculture sector. The DRI is part of priority sector lending, which the government is pushing aggressively to ensure that benefits of economic growth reach rural masses.