Banks are the true agents of development of any economy. They have played a vital role in the overall development of economies world over. Although overall development did happen but the spread of the same is not even all along, which has resulted in uneven income in different sectors and areas. The distribution of credit, therefore, needs to be rationalized in such a manner that the benefits of the same reach out to all across the areas as well as sectors and activities.
Banks have always shied away from lending in rural and undeveloped or underdeveloped areas and sectors despite a lot of directions from the regulators as well as from the state. This is due to the fear of losing money because of the nonviability of the proposed units and schemes in these areas. Lack of proper infrastructure in rural and underdeveloped areas is mainly responsible for the poor growth of the economy in these areas. The prime reason for poor lending in such areas is lack of infrastructure which makes the projects and schemes less viable and hence does not attract bank’s attention.
Now that lot of infrastructure has reached the rural and less developed areas. There are better power availability and better road connectivity, transport, and markets in the rural areas though not as better as in the cities but there is a great push to provide more and improve the existing facilities in these areas. Banks too have opened their units in these areas. The only problem is that banks are mobilizing resources from these areas and passing on the main part of the same for investment in other areas or to their controlling offices for deployment elsewhere. The required purpose of opening branches in such areas, therefore, gets defeated by siphoning out the resources from underprivileged areas to the better-privileged areas thereby further widening the gap of development in different areas. In order to ensure the equal level of development across all the regions, the norms for the calculation of credit-deposit (CD) ratio need to be redrawn/modified. Following suggestive measure may be of help to plug the loopholes in the system:
- To start with block should be considered as a unit. For the calculation of CD ratio, all branches of different banks operating in a block be made to meet the mandatory CD ratio of 60% individually. Only that part of credit which has been utilized within the limits of the block should be taken for the calculation of CD ratio for the block. These ratios should be monitored at the Block level. The block-wise unit size may be carried over to Panchayat level after some time.
- Branches of a bank who in order to meet the requirements of CD ratio exceed the limits of the block and deploy funds in other blocks, or for the units in urban areas or industrial areas in other blocks. All such branches of banks should be imposed with a penalty of 1% on the interest earned on the amount of loan allowed in areas beyond their block and 2% on the interest of the part of finance in urban or an industrial area in other blocks.
- In order to encourage branches in the metro, urban, and semi-urban areas to fund units in rural and underdeveloped areas an incentive of 2% be offered provided 80% employment in such units is given to the locals of the block in which such financing is done.
- Foreign banks who have branches in metros only should also be made to contribute to the development of underdeveloped areas and sectors as per the rules of engagement with them. The Incentives proposed above may also be provided to such banks also.
- The amount of penalty and incentives stated above to be routed through a special fund which may be called ‘ Level Development Fund’ (LDF). This fund may be maintained by the coordinator of the State level bankers committee of the concerned state. Any shortfall at any time in this fund to be made good by the concerned state govt. The incentive to be provided or penalty to be imposed be calculated quarterly basis on the figures of 15th of the last month of each quarter in order to avoid artificial fluctuations on account of any window dressing to which the banks generally resort to in order to show better figures in the balance sheets on the closing date of the respective quarter.
- In the case of consortium financing, the amount financed by the respective member banks of the consortium will be treated as financing in the block in which the unit so financed is located and not the block in which the financing branch is working and the penalty would accordingly be levied. The location of the unit is to be considered and not the location of the controlling or administrative office of the unit.
- In case of income or commission earned out of nonfund based business such as a letter of credit or guarantees of any type, the penalty and incentive of 1 or 2% as the case may be, will be imposed under the similar circumstances of exceeding or entering in the jurisdiction of the block as discussed above.
- Penalty once charged is to be nonrefundable and no claim of any type to be entertained on any pretext such as the account becoming an NPA for any reasons.
- Any shortfall in the amount required to meet the mandatory requirement of meeting 60% CD ratio by any branch of a bank in a block to be kept in RIDF with NABARD at the prescribed rates.
- Branches of the banks in any block may divert funds after meeting the mandatory CD ratio of 60% in the block in which they are functioning for deployment anywhere as per their choice. However, in case they exceed CD ratio for financing within the block where they are functioning, they shall be given an incentive on the interest on the additional amount at 1%.
The CD ratio should be ensured to be maintained at the mandatory level by each branch of a bank block-wise, and by the respective banks district-wise, region wise, and state-wise. Inter-region and inter-state financing to be excluded for the purpose of calculating respective CD ratios. Suitable penalty as proposed above to be imposed on such lending. This would discourage flight of resources from the concerned areas to the other areas and ensure a level development of all areas and sectors.
In the present as well as during the future times the lucrative market for financing is in the rural areas as there is a lot of money and market in that sector.