Lending rate cap on rural credit by banks should be reviewed

Posted by BankInfo on Thu, Dec 22 2011 11:33 am

It is known to all that majority of our population live in the rural areas. Their primary source of earning is from crop production and other farming related activities. Thus, attainment of real and sustainable GDP growth of the national economy warrants developing a vibrant rural economy to ensure a better quality of life for the rural people.

One of the key ways to bring momentum in the agriculture-based rural economy is to ensure enhancing the personal and collective capacity of the individual and family farmers to buy the basic inputs for agricultural production and other related activities.

With this goal in perspective, Bangladesh Bank in recent years has formulated an agriculture and rural lending policy and is pursuing the entire banking system to lend money to the farmers who are directly engaged in agricultural production as well as other rural activities for increasing their capacity to buy the necessary inputs. Until the current fiscal year bank lending to farmers was not compulsory for all the banks. Since government persuasion had failed in the past, regulatory measures instituting a compulsory lending policy to the agriculture sector by the banking system has been put in place from current fiscal.

As a result, the current fiscal's (FY 2011-12) agriculture/rural lending target of Bangladesh Bank through the banking system will have to be achieved by the individual banks to avoid facing regulatory consequences, which may also have a negative impact on the CAMEL rating of the banks failing to meet their individual targets. In the last fiscal (FY10-11), the agriculture/rural lending target through the banking system was about Tk 126.17 billion and 97 per cent of the target was achieved. It has been found that about one-third of this achieved target (loan disbursed amount) was delivered through bank-NGO/MFI linkage. During the current fiscal year, this linkage is bound to become more robust and, according to an estimate, a minimum of about 50 per cent of the agriculture lending target of Tk 138 billion by the banking sector will be disbursed through the NGO/MFI linkage.

A major part of the banking system is being primarily forced to lend in the agriculture sector through NGOs/MFIs due to the existence of a loophole in the agriculture/rural lending policy guidelines of Bangladesh Bank. There is no denial of the fact that the NGOs have been playing a pivotal role in poverty reduction in the rural areas. During the past three decades, owing largely to the collective and systemic efforts of the NGOs, the number of people living below the poverty line has been reduced from 60 per cent to about 29 per cent.

During the same period, agricultural lending by the banking system (excluding the state-owned commercial and specialised banks dedicated for this sector) as a whole was very negligible. Farmers seeking loans had to depend on the NGOs or micro-finance institutions (MFIs). Since there was no other alternative available, the farmers had no choice or option to negotiate the terms for their borrowed money. To be precise, it was a monopolistic system.

The same monopoly in the rural lending system is still somewhat in existence despite formulation of the agriculture/rural lending policy by Bangladesh Bank. The banking system is now obliged to lend to the agriculture sector. However, the banks are indirectly barred to reach the farmers directly due to the regulatory restriction of charging the maximum interest rate of 13 per cent, which does not cover the cost of reaching them. On the other hand, the same "cost of reaching" has been well-covered and taken care of by the regulatory body of the NGOs/ MFIs.

The banking system with its large branch network can reach the farmers directly at a lower cost than the NGOs/MFIs. Banks have their own funds from their depositors. The NGOs/MFIs have a nominal fund base of their own from token participation of the members that is almost negligible to their lending appetite. The cost of fund of the bank is much lower to that of the NGOs/MFIs. The NGOs/MFIs, after borrowing from the banking system, are adding a cost for their onward micro-lending to the interest rate, which is quite high and a big burden on the farmers.

If the regulator allows the banks to add the "cost of reaching" farmers directly, to the interest rates charged by them on agricultural loans, then a huge amount of money can be lent to the farmers at an interest rate much lower than that currently being charged by the NGOs/MFIs, which is as high as 27 per cent. This writer is not opposing the provision of the NGOs/MFIs provided by their regulatory body, taking into cognizance the need for close monitoring and regular follow-ups to ensure recovery of the loans as well as to ensure that the borrowed money has been used for the purpose it was lent.

If Bangladesh Bank allows the banking system to cover the cost of reaching the farmers directly, the banks will reduce their agriculture/rural lending through the NGOs/MFIs. Instead, they will directly offer loans to the farmers at a lower lending rate, say 20 per cent. Opening up of this alternative window for the farmers to borrow at a 7.0 per cent or so lower cost from the present 'no choice' environment will take them out of the historical suffocation of 'forced exploitation'. The farmers will have another door open before them to borrow at a lower cost and for this they will have an edge in hand to smartly negotiate with the other lenders to lower their interest rates. If this meaningful regulatory change comes into effect, a competitive agriculture and rural lending market will be created for the farmers, similar to the options available to the urban borrowers today. This will also help diffuse the regulatory discrimination that exists between the rural and urban borrowers in this regard.

The Financial Express/Bangladesh/ 22th Dec 2011

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