Mumbai: The National Bank for Agriculture and Rural Development (Nabard) has asked the government to modify the law governing its operations so that it can extend short-term loans to commercial banks, private corporations and non-banking finance companies (NBFCs) to fund farm and related activities.
Nabard currently has to secure prior approval from the Reserve Bank of India (RBI) if it wants to lend to any firm outside its jurisdiction, such as NBFCs, chairman Prakash Bakshi said.
Nabard is seeking more autonomy for its board to decide the creditworthiness of potential borrowers without consulting RBI for each proposal, Bakshi said.
Lending support: Nabard chairman Prakash Bakshi.
“What we have suggested to the government is that why should we ask RBI (if Nabard wants to lend to new types of institution),” he said. “Nabard’s board should be able to decide if this is a new type of institution, the terms and conditions, and the eligibility of the party.”
Since its inception in 1982, Nabard has confined itself as a refinance institution to commercial banks, cooperative banks and regional rural banks to give assistance to agriculture and allied activities.
However, in March this year, the organization started lending to infrastructure projects in the power and agricultural sectors at market rates as part of a restructuring its business model to boost revenue. It has already lent to two projects in Karnataka and West Bengal, Bakshi said.
In October, RBI divested its majority stake in Nabard to the government, bringing down its holding in Nabard to a mere 1%. With this, the government now owns the remaining 99% stake in the bank.
Among other things, Nabard has also sought changes in some of the sections of the National Bank for Agriculture and Rural Development Act and Preamble, 1981, that pertain to it giving long-term and short-term loans to companies, Bakshi said. “In each of them, there are limitations, which we want to rectify,” Bakshi said.
To bolster its business, Nabard had initiated restructuring of its business following suggestions by the Boston Consulting Group (BCG).
It has now set up a risk management division, which will assess the credit-worthiness, recovery record and the financial status of a borrowing firm.
In August, Nabard had scrapped its 30-year-old system of uniform lending rates to all commercial banks to encourage lenders to deploy the fund in needy areas. Nabard will now decide the lending rate for such loans to individual banks after assessing how efficiently they deploy the refinance amount.
Early this week, the Union cabinet had approved a proposal to augment the capital base of Nabard by infusing Rs 3,000 crore as government equity in two instalments of Rs1,000 crore in 2011-12 and Rs 2,000 crore during 2012-2013, which would raise the paid-up capital of the organization to Rs 5,000 crore.
Currently, Nabard has an authorized capital of Rs 5,000 crore, of which, the paid-up capital is Rs 2,000 crore.
Analysts said better autonomy would benefit Nabard if it has proper risk management mechanism and business model to lend.
“Nabard’s mandate is actually to give support to rural areas. If they have more autonomy to lend to NBFCs, it will help Nabard to boost its income,” said Santosh Singh, an analyst at Espirito Santo Securities Ltd.
During 2010-11, Nabard posted a 16.7% rise in its total loan book to Rs 1,59,147 crore as against Rs 1,36,292 crore in the year-ago period while crop loan assistance to cooperative banks and regional rural banks stood at Rs 33,400 crore in the fiscal, as against Rs 24,216 crore in the previous year.
Nabard, however, saw a fall in its disbursements of rural infrastructure loans due to capacity constraints by state governments to implement projects in the fiscal year ending 31 March, despite higher sanctions.
During fiscal 2010-11, Nabard sanctioned project loans worth Rs 18,315 crore as against Rs 15,630 crore in the previous fiscal, but could disburse only Rs 12,060 crore, lower than Rs 12,388 crore in the previous fiscal.