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P. Devarajan

A WORLD Bank team is in talks with Nabard (National Bank for Agriculture and Rural Development) to extend a line of credit to fund micro-finance initiatives such as the SHG-Bank Linkage Programme.

As an intro, the two have agreed on the World Bank doing a study of some 5,000 poor households coming under various micro-financing efforts before putting money on the table.

The cash rich Nabard may not be averse to World Bank funding, provided the exchange risk and the interest cost together match the current market price for funds.

A few years ago a top World Bank team had shown interest in funding the rural credit delivery system. Talks were held with the Finance Ministry, RBI and Nabard and it stopped there. Seemingly, the World Bank was insisting on freeing interest rates and modifying the operational status of RRBs.

The RBI did free the interest rates, but has not been able to make up its mind on RRBs. Many are surprised over the World Bank move when Nabard has excess funds at present; more, the premier farm refinance agency is becoming irrelevant.

Nabard has had no managing director for the last six months while the current chairman is expected to retire in about two months. The Finance Ministry and the RBI are not happy with Nabard and are searching for an experienced banker as a new chairman.

In the last few months, most banks have walked out of the costly refinance facilities offered by Nabard with many paying back old dues at a premium. Nabard is turning into a non-entity with no role in the SHG-Bank Linkage Programme. It can take some credit for thinking up the scheme but it does not put a paisa in funding the idea. SHGs of 10 to 20 women in villages collect a minimum of Rs 10 per month and place the deposits in a bank.

In turn, the bank offers an identical loan amount at interest rates ranging between 9.5 per cent and 13 per cent. In some southern States, the idea has been a favourite with the women folk.

Most bankers admit, "Nabard has to get into direct lending and redesign itself. Otherwise, it will be dead.'' Nabard officials do not go that far while admitting to direct lending of the agriculture sector as the best option. The fully-owned RBI entity could face competition in the coming days as there are unconfirmed talks of a Dutch bank pitching in strongly.

A top official at a nationalised bank official is thinking of setting up a fully-owned subsidiary to exclusively look at farm lending. "One could transfer all the rural branches to this subsidiary, employ people from the rural areas at market salaries and push credit to all classes of farmers.

The unit will come under the supervision of the RBI and the central bank should have no objection. Most importantly, the subsidiary should be able to freely price its products and determine loan amounts like that for the corporate sector.

If a bank can float subsidiaries to set up mutual funds and the rest, the RBI should not object to a farming finance subsidiary,'' the official said.

At first sight the idea looks attractive and could be the first fresh thought at reaching funds to a capital starved farming sector. As of date, the co-operatives, the RRBs, the rural branches of banks and Nabard have all failed to help agriculture.

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