During the last few weeks, late Indira Gandhi was remembered with an unnatural frequency and unusual vigour on our news studios. The backdrop was the recent Nirav Modi scam that has rocked the nation and the former Prime Minster found herself being blamed for the Rs 11,400 crore fraud. Industrial bodies like FICCI and ASSOCHAM used the scam as an excuse to demand privatisation of public sector banks as Gandhi’s landmark decision of nationalization of banks was identified as one of the reasons for the ongoing crisis in the banking sector.
Perhaps it then becomes important to revisit the history of nationalization of banks. It becomes all the more important to analyse its need at a time when the rural distress is at a peak in the country where more than half of the population is dependent on agriculture. The state of farming and the people dependent on them is heavily influenced by the institutional loans given to farmers, simply put as agricultural credit but the commitment to agricultural credit depends on the character of the banks in the first place.
The R. K. Hazari Committee report of 1967, which advocated that in order to achieve social progress in the country, the nexus between the banks and the business houses had to be broken, formed the basis for the Nationalisation of 14 banks in 1969. Prior to nationalisation agricultural lending was only 7% of the total lending in India.
Post nationalisation, credit was directed towards the farmers, artisans, cottage industries and small businessmen. The most significant outcome of nationalisation of banks was in form of the development of the agriculture and allied sectors. After Green Revolution, Indian dependency on the PL-480 wheat laden ships from USA became history.
In those days RBI was vested with effective and extensive powers over every aspect of banking including management and supervision of banks, regulation of expansion and controlling the flow of credit. Approval from RBI was necessary for all advances of Rs 1 crore and above to any borrower.
Nationalisation of banks in India also gave rise to a directed credit programme in the country and the share of agricultural finance increased manifold in the country. The National Credit Council was established with the finance minister as the Chairman, and representatives of agriculture, trade, industry, banks and other professional groups.
The priority sector was first defined in 1972 when the National Credit Council emphasised upon a larger involvement of commercial banks in the priority sector. In 1974 banks were given a target of 33.33% as share of priority sector among the total outstanding advances to be achieved by 1979. Based on the report by the Dr K S Krishnaswamy led Working Group of Modalities of Implementation of the Priority Sector Norms the target was raised to 40% of Adjusted Net Brank Credit. Of this a sub target of 16% was to be for agriculture. Today, the sub-target for agriculture stands at 18 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. This led to a natural growth of agriculture vis-a-vis total credit. The share of institutional agencies in the total agricultural credit supply was 7 per cent in 1951, which rose to 66.3 per cent in 1991.
The year 1991 brought big changes into the economic atmosphere in the country. The economic reforms sought to remove concessional interest rates on all sectors except agriculture, small industries, DRI schemes and export credit. The Narasimham Committee – I report of 1991 suggested the phasing out of directed credit programme citing the fact that “two decades of assistance at subsidised rates should have resulted in maturing of agriculture and small scale industry.” As per the recommendations of the committee activities like food processing, related service activities in agriculture, fisheries, poultry and dairying were brought under the ambit of the priority sector.
This led to rich farmers and corporate houses being financed under the priority sector. Financing the small and marginal farmers was no longer an attractive proposition for the banks. On one hand loans to such small and marginal farmers, landless labourers and people from the weaker sections entailed a lot of paper work and on the other hand employment was frozen in all public sector banks. With bank officials being hard-pressed for time, agricultural credit flow to the small and marginal farmers fell in comparison to the richer ones. Subsequently, the norms governing priority sector lending were further diluted to include loans to Non-Banking Financial Companies (NBFC) for on-lending to the agricultural sector, loans to industries dealing with inputs for allied industry like cattle feed and poultry feed, loans to cold storage units to store agricultural produce. The Rural Infrastructure Development Fund was set up in in 1995-96. The contribution by scheduled commercial banks to Rural Infrastructure Development Fund (RIDF) and similar funds set up with National Bank of Agriculture and Rural Development (NABARD) / Small Industries Development Bank of India (SIDBI) / National Housing Bank (NHB) was also accepted as meeting priority sector lending norms. In 2015, Reserve Bank of India revised the priority sector guidelines and removed the distinction between direct and indirect agricultural financing. In 2016, RBI launched the portal for trading of Priority Sector Lending Certificates (PSLCs). The PSLCs are in form of social credits that can be utilised by banks to meet their priority sector lending obligations.
These gradual changes in the priority sector lending norms post 1991 caused a shift in focus from individual poor farmers to corporate involved in agriculture. In 2011, economist Utsa Patnaik had rightly warned that “Corporatisation of agriculture will make farmers debt slaves.”
Post 2000, agricultural lending has witnessed a boom, with a greater share of large sized loans for financing agribusiness oriented enterprises rather than to small and marginalised farmers. The total agricultural advances have grown tremendously from 96,000 crores in 2004 to 10 lakh crores in 2017. Despite this farmers’ suicides could not be abetted in the country. As per official records from, over 12,000 suicides were reported in the agricultural sector every year since 2013.
55% of agricultural credit in West Bengal, 37% in Mahahrastra and 32% in Tamil Nadu is done through urban/metro branches. Whereas in 1990, 86% of agricultural loans had an average ticket size of less than two lakhs, in 2017, only 46% were two lakhs or below. This only goes to prove that credit concentration is taking place in the hands of the richer classes.
Banks, being able to meet up all their priority sector lending norms, does not necessarily prove that the economic conditions of the poor or the middle class have improved. Funnelling of more credit does not necessarily translate to growth and development. The economic liberalisation post 1991 has served the purposes of few individuals and has undone the fruits of nationalisation for the majority. So while 50000 farmers marched from Nasik to Mumbai for their rightful demands and the cronies choose to destroy statues elsewhere in the country, privatisation of banks would break the already fragile bone of the agricultural economy.