Agriculture growth a flop because of Planning?

India of 2010 is not the India of 1947.

In India, which has a population of over 1.2 billion today, does it have sufficient grannery to feed the mouths? Has our Below Poverty Line estimate suffices the requirement of food for the downtrodden. The much proclaimed Food Guarantee Bill, will it create a harvest of mouthful for these have-nots? India is looking forward to a thrillion economy; in these, how much these dastard and laggard people, earn to lead a hand-to-mouth livelihood. Has Malthusian theory come true in India?

When the First Five Year Plan gave supremacy of Agriculture, and the Green Revolution that followed, today’s plan (XI Five Year Plan) has hopes of achieving 4% growth even though the Plan delivered a flat 0.20% during the mid-term analysis of the XI Plan. The Plan, gives scant outlay to agriculture, does not evolve Schemes to better productivity in agri-based products, and in the least pretexts, and look as an instant solution to Imports. It even imported Public Loan 480 from America, the rice not fit enough even for rats! The Rice, and wheat stored in the Food Corporation of India mainly meant for distribution to the BPL families, is fodder for rats. Food Security Bill with Crores of Rupees of public money can be advantageous only if the food reached the poor, downtrodden. In India, for agriculture subsidy, kerosene oil subsidy (for lighting, cooking), fertiliserz, etc the middle-men knocked off a chunk of money. The Plan architect Montek Singh Aluwaliah, and the agriculture expert Dr Swaminathan are polls apart in perceiving what is best for agriculture. Our Economists theorize but often theory in the alter of reality never meet; we have massive outlay for Agriculture, that is funds spent in the name of agriculture. Hydro electric projects drowned the fertile lands, and doused the agricultural yield. Conversion of agricultural land for development, a mantra of the Globalization concept, has devastated agricultural development and growth. In Kerala, where Coconut was a plantation has become a home stud crop thanks to Kerala Land Reforms.
First area of concern is Agricultural Credit. Credit flow has risen sharply, Dr B K Chaturvedi, Dy Governor will explain eloquently. The Credit was channelised through RRBs, commercial Banks in rural areas. Commercial banks gave loans to SIDBI and other institutions that supported agriculture. Agricultural loans were characterized as priority sector loans. In the last decade or so, loans were given to Corporates, tractor manufacturers, fertilizer companies, advances worth many Crores, but they were shown as priority sector advances to agriculture. A disturbing future of the agriculture Credit is astronamal growth of agricultural finance that is urban in nature. The share of agricultural Credit supplied by urban and metropolitan bank branches in India increased from 16.3% to 30.7%. . One third of the agricultural Credit was given by metropolitan and urban banks while the share of the rural, semi-urban, RRB got reduced to less than 50%. One question is pertinent- Corporate/agricultural firms get Credit over Rs 1 cr in aggregate per borrower, but shown in Bank books as agriculture Credit (2007 onwards). Is it not an institutional make-up in the loan portfolio to show that Credit for agricultural is growing. Fertilizer subsidy, one would like to ask the question. How much have fertilizer companies grown their declared profits, and what catalytic role they played in improving agricultural productivity? In the state of Maharashtra alone, rural branches provided 25.7% credit towards agriculture while metropolitan bank branches gave a credit for agricultural sector @ 42.6% of the total agricultural credit in Maharashtra in 2008. The actual farmer in the villages, whose financial needs are sparse, would benefit the least from the present Agricultural Credit Policy which are pocked by Corporate, partnership firms having as allied enterprise, agriculture, etc. Reliable data is available to show that what is termed as agriculture Credit may have little to do with agriculture! Shocking!

The Second area of which government is least concerned is the irrigational source. Hon’ble Minister of Agriculture, Dy Chairman of Planning Commission will blame the rains for failure in Rabi crops or poor show of kharif crops. Poor monsoon, sluggish agriculture growth. No agriculturalist is concerned about average rainfall data but he looks for daily rainfall during the agricultural season for his survival. The Planners presuppose that the fluctuation of monsoon on a year-on-year basis is the problem of agricultural diminishing returns. It is not the total rainfall or levels in reservoirs that matter to majority. It is the rain on time. Dry crops might not require lot of Water or expensive irrigation facilities but timely rain. Drought related measures to temporarily assist may be useful but strategic and long term measures need to be taken. Here, our planners have failed lock, stock, and barrel. Irrigation infrastructure is deteriorating due to poor maintenance of irrigation systems. The overuse of Water is being covered by over pumping aquifers, but as they are falling by foot of ground water yield, this is limited resource. It is unscientific approach of the Planning Commission for the improper use of water, irrigation planning.

We suggest some steps: a. Agriculture, adaptation measures in rural sector should receive major institutional/financial support for evolving policies for implementation of specific programmes in the short- to- long term. (b) Measures to manage water resources on an annual cycle basis and it should be stored and distributed; some times long spell of rainfall above the normal, some times successive draught hamper the storage of water policy. The water storage level has to be decentralized to a sub basin level. Storing water on surface and underground in order to build storages for later years need to be planned. (c) Focusing on dry land agriculture and soil moisture. 75 million hectares are under food grain production in the dry land mode (d) Policy interventions: lack of saving the water or improving water productivity is actually leading to wastage. But not one rupee is in the XI Plan is allotted; (ii) incentives to use chemical fertilizers may actually induce soil degradation and put farmers of dry land farming in disadvantage(iii) Poor farmers, rural farmers do not require Rs 1 cr capital loan; the metropolitan banks need not support agriculture. Let it to be supported by NABARD (by forming micro finance companies run by honest NGOs), RRB, and Rural Banks. Stop writing off of loans, stop free power, and re-look at the clients who have agricultural loans.

Let Planning Commission answer. Let RBI do some introspection in respect of Credits to agricultural farmers? Let the Agriculture Minister look at the agriculture in its total prespective. Let the Controller and Audit General, look at Crores of Rupees of money not getting into the Agricultural arena? Let the opposition ask pertinent questions and do some honest homework. Let our newspapers and electronic media look at the agricultural issue in germane and file a faithful and accurate report. All these institutions are sleeping. Only when rats enter the FCI godowns and eat wheat, the matter comes to national attention?

Is infrastructure choaked with traffic?

Infrastructure capacity over-stretched in India?

India’s infrastructure, meaning Ports, Roads, airports, and railways, are they sufficient to meet the burgeoning demand of the economic growth of the Country which is expected to emerge as one of the largest economies of the World in a few year’s time?

Is India’s growth commensurate with the growth in automobile, bus, motor vehicle, two wheelers, three wheelers, four wheelers, six wheelers, and giant trucks that move Containers, passenger growth in trains, aero planes, and Container traffic through ports?

Has the Planning Commission estimated the normal growth and superfluous growth, and arrived at the forecasts that would accurately predict the demand: Supply? Year-on-Year, the Finance Ministers have worried about raising expenditure, bridging the gap, collecting taxes, and focusing on bringing down the fiscal deficit, and allotting a chunk of money for populist schemes with the Vote banks in view. Is there any sincerity in their spending for the downtrodden? Is it aimed at making their standard of living grow? With all the spending, the have-nots increase in geometrical progression. Why? Faint and half hearted attempts to give an impression that the Government looks at an egalitarian Society, when Laws are framed and passed to assist the rich grow to figure in the Forbes List!

You cannot plan growth of rural areas by experimenting with examples. Gross root economics is not what is visualized in the theories of master economists. Even Hayward and London School economists failed to come up with an alternate strategy when the world economy led by America and Europe fretted and fumed?

The Central Government can wash off its hands saying that Road Transport is a state subject. That is why, when they raise the price of petrol or diesel, they tell states to reduce the Commercial/Sales Tax. But it is a fact that the vehicle population, both existing and new, is out of proportion to the available infrastructure. India hardly spends 4% of the GDP when China allocates 9% of the GDP for infrastructure growth. Infrastructure capacity is wholly inadequate rather inconsistent. The supply has not picked momentum against demand. Sector has not achieved the growth commensurate with its potential. The Road usage should have been restricted to 70% of its capacity. In India, the Road capacity is stretched beyond 100%. Port capacities are extremely stretched which raise inefficiencies as the utilization has breached 100%. The traffic is growing at a Compounded Annual Growth rate of 20%, while new capacities created are sizably low. Strong domestic consumption and favourable demographies in terms of young working population in India has resulted in heavy growth of vehicles. To cite an example, the State Bank of India, Kerala Circle, (the smallest circle of the SBI in India) gave auto loans to the extent of Rs 354 Cr in 2009-10 against Rs 34 Cr in 2008-9. What is the percentage of increase? Can the roads in Kerala, limited as they are, accept this additional load?

Just to give comparative figures, the automobile population (including the two wheeler segment) in India during 1990-91 was 22 lakh against 8.59 Cr in 2008-9.

According to statistics provided by the Economic Survey (2009-10), 11,037 Kms of High way has been completed. The Survey says that 1, 45,000 Kms of rural roadways at a cost of Rs 37,000 Cr has been laid upto 2008-9. This year’s budget for the NHAI is Rs 6,972.47 by Cess Funds collected from petrol & diesel users. The Government concedes that it underwrites under-recoveries to the extent of Rs 20,000 Cr. The Cess collected through compulsory taxation is 30% of the under-recoveries. Government should explain that when such is the case, how they can say mathematically the oil Companies are in the red, even after an upward increase every three months. There is something wrong somewhere, taking into account IOC profit of Rs 10,000 Cr in 2008-9. This is a mathematical puzzle more complicated than Satyam. If we look at the budget of NHAI, Rs 6,942.47 Cr is collected through Cess, Rs 1515 Cr is ploughed by way of External assistance (in the form of grant & loan) Rs 379 Cr + Rs 1096.26 Cr borrowings, while the actual Government’s budgetary support is only Rs 159 Cr. Mr Kamalnath is right that when the planning commission coughs up just Rs 159 Cr through budgetary support while the Ministry’s fixture is to lay 20 Kms of highway totaling 7,000 Kms of national Highway per annum. That is to say Government spends Rs 2, 27,142.85 to build 1 km of National Highway.

Private Sector invested 19% of the total plan outlay as participation in the Highway Development Programme, while it has grown to 30% in the XI Plan. Only in the building of Roads, PPP has risen from 5% to 36%.

Term funding, both equity and debt, by Banks, is impossible for the simple reason that the gap in long term debt financing is largely due to asset: liability mismatch facing the Banking industry. Long term equity capacity is also difficult to come by. Permitting pension funds and insurance cos to invest in long term stabilized constructions like roads, directly and indirectly, would be cost effective. Indirect investment in infrastructure funds or creation of listed perpetual funds holding infrastructure assets where investors could invest with an annuity philosophy may be explored. Foreign Exchange Reserves may be deployed for asset creation at little costs but with high returns. If Planning Commission goes on singing in chorus as to the whereabouts of the funds, even though the deployment is in unproductive and unwanted sectors, the infrastructure development will halt the country’s progress.

Improbable saga of piling cases in Courts?

The cases pending adjudication in the trial Courts, High Courts and Supreme Courts are over 3 Cr, according to authentic Government sources. . But Chief Justice disputed the figure of mounting arrears and status of all cases that is pending administration of Justice. Justice S H Kapadia, the Chief Justice of the Supreme Court addressing an all-India Seminar on Judicial reforms held at New Delhi recently.

The Chief Justice, like an experienced Economist explained that a Case filed today becomes a pending case of tomorrow. But, is that an arrear? CJ queried the audience in the immediate presence of Hon’ble’ President of India Smt Prathiba Patil, and other distinguished legal luminaries. He went on to report that 60% of the Cases pending in trial Courts were less than a year old. A realistic look at the arrears of Cases excluding cases which are a year old, the Chief Justice remarked, were around 1 Cr cases. He readily conceded that 1 cr cases were not small figures, and hence felt that a three track mechanism would help the Court to dispose off these Cases faster.

Track- I would comprise sticky cases involving complex questions of Law and would take time for adjudication; Track-II would include’ subversive’ cases where one of the litigants try to unduly prolong the case. Track-III cases are those which are delayed due to omissions and commissions of delay in serving summons and notices. He felt that judicial reforms should percolate to the Bar as well, if it has to be meaningful. He also invited senior advocates to contribute their wisdom towards expedition of complex cases.

The President, in her speech recounted the problems of the litigants in getting delayed justice. The justice delivery system has been afflicted by explosion of litigation. While she agreed with the Chief justice that we have to draw a line between arrears and pendency of Cases, even though the pending cases has been put at 3 cr which may include cases filed during the last one year.

She reminded the audience that while the litigant has one life, litigation transcended generations. She wanted Court procedures to be simplified. Frequent demands for adjournments, filing of multiple suits and similar tactics should be avoided to increase judicial productivity. Timely pronouncements of judgments and execution of decrees would go a long way to provide Justice without delay.

The major piling up of the Cases are the result of Government filing appeal against each and every judgment made by a lower Court without examining the merits of the Case. When a case is referred to the Law Ministry, the so called Under Secretary, finds it convenient to say that a grave lawful point has to be clarified, hence suggests filing an appeal. If due to any reason, he writes against appeal, there is a distinct possibility that the CAG or some other agency writing a note against the grave loss that the Government underwent because of non application of rational thinking. In many Cases, the Supreme Court had frowned upon the Government for filing appeals against judgments when there was not even 1% merit in the Case. The Government can indulge in such vexatious luxury as money is no constraint. So judicial reform should include Government on flimsy texts approaching the Court of Law for remedy when through arbitration, it can solve the case without indulging in wasteful expenditure This will curtail wastage of Court’s precious time. Reforms should begin at the Government’s cupboard.

Paradox of urban growth -imperfect Planning?

The paradox of urban growth is creating Crisis in Cities. We have to view the problems in India in the global context, and have to arrive at short and medium term solutions based on the experiments and experiences of other countries.

While we should examine the global problem of urban transportation and the resultant consequences, and see as to how we can discover our own ways and means to cope up with compulsions. Developing nations where cities have sprung rather suddenly against planned cities in developed countries, have to make frantic effort to re-schedule the gaps in planning for organized growth.

The Government of India conceived quadrangular National Highways, with the corridors from east to west (Konkan coast to Coromandal Coast), and North to South (Kashmir to Kanyakumari). Ministry of Surface Transport, has identified the National Highways for relaying and in the XI Five Year Plans, 20 Kms of National Highways was proposed for construction which eventually would create 7000 Kms of National Highway every year. The standard requirement of right of way (RoW) for National Highway (NH) development projects have been proposed as 45 meters. In the metro Kochi, there is a Broadway, which was once upon a time the broadest way in Ernakulam (Kochi). But today, only two line traffic with over- stretched driving on the pedestrian layouts would enable two cars in both directions to drive along the Broadway. The 70 feet Road which came later was viewed as one of the biggest road lanes in Ernakulam, Kochi. Today, when 8 line traffic is the order of the day in most developed cities, this pales into insignificance in comparison. There has been resistance from merchants in Kerala on widening of the present National High which hardly can manage two lanes, one for to and another for fro. In no other state, the National Highways are so narrow, that the traffic has to snarl at important junctions to the towns. The State PWD had asked NHAI to reduce the requirement of right of way to 30 meters from the proposed 45 meters. The NHAI has cancelled the four laning of the NH 47 stretch from Cherthala to Kazhakuttam. The busy 200 Km NH 47 was to be converted into four lanes in two stretches, the first stretch from Cherthala to Ochaira and the Second from Oachira to Kazhakuttam at a cost of Rs 4,700 Cr. The State Government had contended that a width of 45 meters was too heavy a demand in a densely populated state like Kerala (population density of 819 per Sq Kms). But the load on a 30 metre wide road cannot at the first place have a four lane traffic space, and secondly, the capacity of roads to carry traffic has to be in tune with the standards laid down. Each Road has capacity, and if the capacity is exceeded, it would cause wear and tear. The specific problem of Kerala has been unplanned growth of cities in Kerala, insufficient lung space for laying of wide roads, and the traffic not proportional to the weight that Roads can carry. A 12 tonne lorry should normally carry a load of around 11 tonnes. But it is often seen that the lorry carries weight to the extent of 15 tonnes. This affects the spring plates, the tyre made of natural rubber+synthetic rubber, whose life comes down tremendously, and has impact on the life of Roads (Highways). Haywire in planning, political clout, and unplanned cities do not allow smoothening of urban transport. Horse drawn carriage, sophisticated car or mass transit system would ease congestion, regulate orderly transport, removing impediments to mobility, will make a mega city an asset rather than a liability. Fast growing vehicle population, density of high flow of traffic in a particular area, scarcity of space, deteriorating environment and the problems of encroachments have to be tackled politically, if the cities, mega cities, metropolitan cities have to grow.

The status of our road infrastructure either clogged with too many vehicles finding their way through haphazard parking, or dug up for reason few would be aware of. When a vehicle sporting red flash right overtakes the cars that are in the queue crawling with impatience. Infrastructure is more than a sea wall or a software park. It does not make any difference even when you are inside your house, by ensuring predictability in the supply of essential services such as power and water. Infrastructure comes under stress and at times, breaks down in times of crisis.

A system’s approach to traffic planning and management is absolutely necessary. While developing a traffic system management, the key should be identification of the problem areas and focus on sub area activities in tune with the nature and composition of the area. Depending upon the type of traffic-pedestrian, MRTS, taxi, auto, cars, buses, bicycles, and the system should be designed. The hawkers on the edges of the roads or pavements must be properly rehabilitated at permanent areas ear-marked for them, and given licenses to run their business from interference from the law enforcement agencies, and pedestrians should have enough pathways for them to walk without spilling over to the Road, etc. Bus bays must be constructed so that parking of buses at undesignated stops which obstruct traffic, have to be designed. Lane reversal and flexibility mechanism, linked to flow of traffic, need to be tried. When the peak hour flow of traffic is into the City or the business district, the meridian could be adjusted to open three lanes, leaving just one for the opposite direction. In the evening, this can be reversed.

There has been a big cry about wanting Metro to take care of Kochi's traffic woes. Whether it is through Public spending, or PPP model, such a metro is not possible in Kochi. When planning the satellite towns like Ambalamedu, Chottanikkara, Edappaly, Kalamassery, if the Kochi Corporation or for that matter GCDA could have planned arterial sataellite towns in a planned way, leaving the approaches so that transportation could have been possible. as it is, we have narrow roads, less width National High ways, unusaable State High ways, panchayat roads, etc are in pitiable condition. When there is loud pandamonium for stretching the NH to 45 meters, how could you go for metro. Where are the artiel roads or points?

We need to copy the developed system that is prevalent in Singapore. Road discipline, reducing the number of vehicles plying on the road at peak times, pooling of cars, transport systems, popularizing cycles like in China, would reduce the over dependence of vehicles, reducing pollution, high use of petrol/diesel, extended cost, wear and tear of roads. Urban planning need to be methodological, economic and scientific.

The Big Fat family connection

TVS Group of Companies indulge in making Car spare parts which include Original Equipment manufacture as well as replacement parts and is worth several billions. The nestling Padi Township is the home of TVS Companies and the distribution of spare parts is through Sundaram Motors, Madras Auto Service, and their dedicated distributor net-work. . They ran the TVS Bus service in Madurai, and still do transporting of goods through TVS Motors. Their financial arm is Sundaram Finance Co. They also manufacture tyre through TVS Srichakra

The suave and handsome Venu Srinivasan, who is the CMD of Sundaram Clayton Ltd, and the first Indian auto spare parts company to imbibe the Japanese quality systems in India, has been visible as an icon to the entire fraternity of industrialists when he was the President of Confederation of Indian Industry. The TVS group has patronized CII, as all their companies are members and occupy distinguished posts in the CII hierarchy.

Shri Venu Srinivasan is married to Mallika Sivasailam, grand daughter of late Shri S Anantha Krishnan, who is a pioneer having established the Amalgamations Group. Mallika was the Past President of Madras Chamber of Commerce & Industry, and is in command of Rs 6,500 Cr TAFE.

Infosys is the new face of India. Its founding heralded the dawn of Indian software industry. Its scale to fame was as unprecedented as India becoming Cricket World Chamopion in 1983. From a modest beginning, it began to scale new heights. This Company made Bangalore the Silicon Valley of India. Its founder Shri N R Narayana Murthy was a man of the soil and simple in habits and outlook. But he was a giant in his own right. His wife Sudha Murthy was known for her munificence.

What happens when these two giant families come together through their kith and kin? Rohan Murthy, 28 year old son of Shri Naryana Murthy proposed to 26 year old Lakshmi Venu, daughter of Venu Srinivasan. They say marriages are made in heaven but the decision to marry was taken in America. Rohan proposed and Lakshmi nodded. Both Venu and Narayanamurthy became Sambadithis (a Tamil term for in-laws).

Automobile industry tycoon’s worthy scion marries the prince of the software industry. The automobile tycoon and the software czar are bonded together by marriage.

May providence shower his blessings to the would- be couple.

How correct are Met's forecasts?

Why is it when the Meteorological department predicts rain, it turns out to be a sunny day and when they ask us to leave the umbrellas and safely predict sunny day, it rains cats and dogs. Why the predictions often are go astray? When we click a message, it lands in somebody’s computer in the remote corner of America in seconds. When Science has advanced, discoveries have overtaken old discoveries, Aryabhatta satellites circle around the world high up in the sky, sending terrestrial pictures which should make the Met department to predict the cloudy weather, thunderstorms, the devastating fury of the winds, the accurate direction of the winds, its pace, the depressions in the bay, accurate to cent percent even to the decimals. No Government weather forecasting department forecast the tsunami correctly but gave all sorts of stories about the tsunami once it destroyed, ravaged, and devoured scores of human beings.

Presently most of the forecasts are done using Doppler radar (costing around Rs 20 Cr), a crucial piece of equipment in weather predictions. Doppler radar system is capable of predicting the weather for a 400 Km radius. This system is used to predict rain, thunder showers, temperature, wind speed, atmospheric pressure. Like Government hospitals which have scan machines having high cost, lying unused, though donated by philanthropists because the Government is yet to appoint trained officials to man them, the Dopler radars purchased for many important cities are lying idle at Delhi for the last 6 years because the concerned State Governments has not provided a piece of land for its installation and location. What a pity? We have CAG writing obstructive comments, and Parliamentary Committees writing scathing reports which are placed in Parliament, yet our inefficient bureaucracy remain unmoved. They move at the pace of the bullock cart, and organize a fight for nothing holding the whole country to ransom in the name of collective protest. .

The Doppler radar is a compulsory equipment for every IMD headquarters. It is an important scientific aid to predict the vagaries of the weather correctly. But how many of the State Governments have provided the IMD with land so that the Doppler could be properly installed. The Director of meteorology has little clout, and the Ministry of Science and Technology requires a T N Seshan to wake up the Rip Van Winkle out of slumber. So callous, so faint, so powerless is this department.

Further, there is no co-ordination between the Centre and the state government. The Director of Meteorology hardly gets an audience with the Chief Minsiter of a state, much less has clout to meet the Chief Secretary. When we have state Chief Ministers’ Review with the prime minister, when the Dy Chairman of the Planning Commissioner as powerful as Dr Montek Singh Aluwaliah, can sing sweet songs about the growth rate based on the Plans authored by it, and seldom able to achieve it, why can’t these top people at the helm of Government do simple things which do not require any 2/3rd of voting in Parliament and more than half of the states to approve it, and which does not require Doctorate degrees for implementing it. The financial outlay is rather negligible compared to the colossal expenditure planned for holding the Commonwealth games, where various financial and implementation irregularities have been noticed?

Dept of meteorology which do not get government land to install Doppler have to base their forecasts on satellite data uploaded from Delhi. Some enthusiastic Chief Minister’s are keen on putting up automatic barometers to check temperature and rain gauges for forecasting rain, investing Crores of Rupees, when they are unable to provide a little land to install Doppler radar. And we talk about agricultural growth to achive 4% in theory, when in practice it has just been able to grow (+) 0.20%. Crores of Rupees have been spent on literature, but the essentials are not in the book mark of the rulers of to

Checkmate- Rural Credit & Financial inclusion

Reserve Bank of India feels that a set of new generation banks should be permitted to enter the banking arena so that it could fill the rural space where there are giant opportunities. A discussion paper on new banks is under preparation. However, the Central Bank has clearly stated that it wants to restrict bank licences. It does not want to unnecessarily expand the list in the Second Schedule of the RBI Act (the list of Scheduled banks). The central bank is also not interested in giving licences to large industrial houses from operating banks because of potential conflict of interest. Industrial sponsored banks could give unwarranted but preferential credit and write off loans to related companies and other favoured borrowers. India has weak corporate governance; hence restrictions should be placed so that use must not be misused.

According to RBI, there is a huge uncovered area for stretching banking. Only 30 % of the country’s area is covered by the banking sector. The rest goes without banking. If financial inclusion, the mantra of the Government of the day, should translate into reality, then the spreading of banks to rural areas is compulsory. Government’s experiments with Regional Rural banks have met with disaster. They have suffered heavy losses, because their preference was in one area while the taste of the Customer was in another. Rightly, RBI wants the new generation banks to localize their operations in rural areas, rural lending. There is plenty of rural space, where one would not be privy to competition. But the operating costs will be very high because of poor logistics. A bank’s geographical area would be large sized even though rural deposit accounts and credits are very small. Agricultural defaults in many states are high since political loan waivers have encouraged willful default. Due to extensive political patronage, Banks find it difficult to seize the land defaulters have pledged. Further, loans up to Rs 10 lakhs have been exempted from collateral security and third party guarantee.

The success of micro finance pioneer Bangladesh’s Grameen Bank, has given enough ammunition to the Indian counterparts – Microfinance institutions have come up. Micro Finance Institutions in India started off as non-profit NGOs. They depended upon public munificence for expansion. To grow faster, many of the NGOs converted themselves to for profit Non Banking Finance Companies (NBFCs). These NBFCs raised equity from various sources. For every one Rupee of their own, they could raise Rs 6/- from Banks. This enabled them to grow fast as they had toe-hold on the pulse of the rural people. SKS Microfinance, the largest player in the field has recently raised a whopping Rs 1600 Cr through Public finance. SKS is now bigger than some banks, with almost seven million borrowers worth Rs 5000 Cr in credit and around 20,000 employees. SKS and other MFIs could evolve themselves into Banking. RBI Guidelines insist that new banks must have equity capital of at least Rs 300 Cr, and no promoter group should have a stake of over 10%. These NBFC can raise more than enough equity with a wider shareholder base. NGO approach was sparse, and they could offer very little by way of Credit, while rural India wanted giant networks. Giant networks require massive capital, which can be attracted by for profit corporations. Besides scale economics will permit giant MFIs to lower the interest spread to poor clients.

Micro Finance institutions do not want to convert themselves into banking as they would come under the purview of RBI regulations. They have flourished in the consequent freedom to innovate and expand according to an eminent economist. RBI takes ages to approve branches, while MFI can freely open many at will. The staff pattern in the MFI is flexible, cheap but as banks they will face unionized wages and inflexibilities. If they turn into Banks, they have to park 25% of their money in Government securities and 6% with RBI, suffering losses. Financial discipline will go haywire if political loan waivers are put into practice. MFIs are also into consumerism, making a profit on the Credit extended to the borrowers. If MFIs have to borrow from Banks, they have to shell out 12-14% as interest, but if they become banks, they can generate deposits at 3-6%. As per the present guidelines of RBI, not only non profit NBFC can accept deposits while for profit NBFC cannot accept deposits in the wake of fly by night thriving NBFC which mushroomed in 1990 and went bust and couldn’t repay.

If rural spread is the need of the hour, and if financial inclusion need to be promoted these MFIs should be registered, and a mechanism should be evolved so that they would serve the rural areas, with their wherewithal, experience, and rural geography. RBI should come of the standard theories, should innovate and take India to a path whereby non banking areas will be served by localized institutions. However, a check mechanism needs to be put in place, so that the MFIs can play a useful role in carrying thrift and credit to the authentic India.