FROM BUSINESS WORLD OF 1 JANUARY 2006
Aam aadmi credit cards
Kisan credit cards (kccs) have accumulated seven years’
experience now. The term “credit cards” is a misnomer; what most banks have
operated is revolving credit against crops. They sanction a certain credit
limit for a farmer, and within that limit they give loans to him against crops
up to a certain threshold and against his land over the threshold. All
borrowers are issued a passbook just like for a normal bank account; in
addition a bank may also issue a credit card, but it is not essential. Cash
withdrawals can generally be made at any branch of the bank in a district; in
addition, inputs can be bought from selected dealers on charge. The scheme has
covered close to 50 million borrowers.
As the scheme spread, its
shortcomings came to be perceived. Banks tried to deal with them as far as they
could. An obvious lacuna was that monitoring the use of credit required
laborious policing and could not be effective. Farmers did not need credit for
crops alone. They needed money for all kinds of contingencies, and to deny it
to them irrespective of their financial status and record made no sense. Thus,
Andhra Bank allowed borrowers to use up to a fifth of the loan for
non-agricultural purposes; other banks made similar concessions.
Some banks were uncomfortable
with the idea of revolving credit, and laid down repayment schedules against
each amount borrowed. Some banks gave cheque books to borrowers who were
literate; the rest were restricted to cash withdrawals from the branch which
had given them credit. Calculating credit limits against growing or future
crops was a hassle; some banks based their limits instead on land or on total
income.
The biggest shortcoming of the
scheme was insecurity on both sides. Banks were fearful that farmers would not
repay, and laid down stringent repayment schedules; they thus nullified the
idea of revolving credit. Farmers, on the other hand, suspected banks of not
really intending to give revolving credit; they feared that repayments would
not lead to renewed credit, and therefore put off repaying. Thus the
paychological factors built into farm credit, which induced farmers to turn
defaulters and banks to turn vexatious usurers, persisted under the kisan
credit card scheme.
Nevertheless, whereas earlier,
banks gave farmers credit for each separate transaction, kccs permitted them to
give farmers credit based on their assets – crops or land. They thus reduced
paperwork and hassle. For that reason alone, both banks and farmers rapidly
replaced old-style loans by kcc loans. It is not certain that kccs have
increased credit to farmers beyond what it would have been otherwise; but they
have made things somewhat easier for both them and banks. For that reason alone
they have caught on.
Now Reserve Bank has decided to
do something about the restriction of kcc loans to agricultural requirements
and the difficulties it led to. With the same stone it has decided to kill
another bird: it has decided to show its concern for the ruling government’s
favourite, the common man.
It has asked banks to give
so-called general credit cards (gccs) to non-farming borrowers in rural and
semi-urban areas. It aims to remove some of the hassles of kccs by delinking
credit from its purpose or end-use and from the security. In other words, banks
are now being asked to give overdrafts. Women are to be favoured gcc borrowers.
Half of the credit so given would count as agricultural credit, though it would
not be such, and go towards fulfilling the banks’ priority lending
requirements.
If banks take Reserve Bank’s
instructions seriously, gccs would be far more convenient than kccs. There is
no bar on farmers taking to gccs, so we may well see an exodus from kccs to
gccs. Then Reserve Bank may well wake up and tell the banks to stop such conversion;
then banks will be obliged to make sure that everyone who asked for a gcc was
not a farmer, and that even if he was not, he was not financing crops or
fertilizers or some such agricultural commodities.
Instead of playing political
games in the guise of regulation, Reserve Bank should recognize the basic
principle that the correct basis of lending is a borrower’s financial status,
as reflected in his balance sheet and profit and loss account, and his honesty;
and that the purpose of borrowing is irrelevant except insofar as it might
affect the borrower’s financial status – for instance, if he is going to make a
stupid investment. If it did, it would stop creating fictitious categories of
loans and borrowers, and let banks get on with their job, which is lending
prudently and profitably.
