RBI to Raise Lending to Match Private Moneylenders

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By Abhishek Anand
RURAL MONEYLENDERS, used to charging high interest rates from the indebted poor, will have competition once the regional rural banks (RRBs) have been recapitalised to raise their lending ability. The government has accepted the recommendations of the Deputy Governor of the Reserve Bank of India (RBI), KC Chakrabarty, to pump around Rs 2,200 crore into the RRBs to substantially raise their capital adequacy level. This is a measure of a bank’s capital in relation to its lending, and thus a barometer of its health.
The 15,475 branches of the 82 RRBs in 619 districts — the primary formal source for farm loans and other rural financing — have, for the most part, been out of bounds of the poor because as many as 23 of them have a capital adequacy ratio of less than 7 percent; and in seven of them it was a measly 1 percent till last March. This may be a mild improvement since March 2008, when 22 of them didn’t even have this much.
According to a senior finance ministry official, the committee headed by Chakrabarty also favours having a separate fund of Rs. 100 crore to train RRB staff and build capacity. The move will raise the banks’ capital adequacy to 7 percent by March 2011 and 9 percent by 2012. The committee had examined ways to strengthen rural banks, so they can support an agricultural growth rate of 4 percent over the next few years.
The money should also help clean up the banks’ balance sheets. Though only three RRBs made losses in 2009-10, the accumulated losses of 30 such banks stand at Rs. 1,808 crore. In sync with the government’s focus on the rural economy, RRBs have been concentrating on priority sector lending. Against the mandate of at least 60 percent loans to this sector, the share of such banks has been above 80 percent. The banks also provide loans of up to Rs. 5 lakh to small-scale industries, and the retail, education and housing sectors. In 2009, they gave loans worth Rs. 56,268 crore.