The Hindu Business Line : World Bank blames Govt policies for poor rural lending

Home Page - RBI & Other Central Banks
Industry & Economy - Rural Development
Government - Policy

World Bank blames Govt policies for poor rural lending

Our Bureau

The study also held RBI's credit planning policy responsible for the plight of rural lending.

Hyderabad , Sept. 18

THE World Bank has held various policies of the Government responsible for a highly inadequate supply of finance to the rural poor.

In a report titled `Scaling-up access to finance for India's rural poor,' the World Bank has pointed out that a combination of various factors has affected both banks and their clients. This has driven up costs and hampered access to the poor.

The study has observed that the Government policy has created a `financial climate' that is not conducive to lending in general, and to rural banking in particular.

"High fiscal deficits, the Government's domination of rural finance institutions, persisting weaknesses in the regulatory and legal framework, and a set of policies towards the sector that have been designed to gain political patronage, have resulted in the distortion of risk/return signals and inefficiencies in the delivery of rural finance services. An outcome of these realities has been a dilution of the credit creating role of rural banks," the World Bank report said.

According to the World Bank, the high fiscal deficits have led to the Government's appropriation of a large share of financial savings for itself, pre-empting credit to the private sector. However, the Government's deficit financing policies have provided bankers with opportunities to deploy bank resources in Government securities, which are not only safe, but also yield high profits for banks in a declining interest rate environment.

The World Bank report has pointed out that the directed lending norms that require commercial banks to allocate 40 per cent of their lending to the `priority sector' have not generated the intended results, since most of the banks get around this requirement by subscribing to other eligible instruments.

Further, the study also held RBI's credit planning policy responsible for the plight of rural lending.

The `service area' policy of RBI, whereby each rural bank branch is given a set of villages within which it can operate, restricts competition in rural banking.

The RBI policy not only restricts bank branches from optimising their infrastructure, but also restricts the entry of new, non-service area bank branches (including private sector bank branches) into the service area.

This is because the entry of non-service area bank branches into the service area requires a no-objection certificate from the service area branch, "which is often not easily forthcoming," the World Bank report observed.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
IFFCO in Rs 2,180-cr deal to acquire Oswal Chem units

Oil cos targeting rural customers

India set to forge energy alliances across S. Asia

Easy to recommend, risky to follow

World Bank blames Govt policies for poor rural lending

TRAI rejects move to issue directive on access charge

The good old radio draws advertisers