Interest rate for small Borrowers

This refers to news that bankers are demanding freedom to decide interest rate for loan upto Rs.2.00 lacs sanctioned by them.

In 1969, banks were nationalized with sole objective of making it accessible to each Indian, each villager and each town dwellers. It was aimed to give relief to village farmers and small traders from the exploitation in the hands of local money lenders who used to charge heavy interest and who used to give unbearable pain to villages if they failed to repay the loan in time. Landed property of most of the villagers used to be under mortgage with local money lenders. Farmers usually under the burden of interest used to fail in repayment and as a result local moneylender gradually became land mafia in that village.

To stop exploitation, Government of India adopted Lead District approach almost fifty years ago in which lead bank in a district is given the responsibility of all round development of that district and banks are entrusted the duty to lend villagers as per their need to end exploitation by money lenders . In eighties, to give further boot up to development through micro finance , government introduced Service Area Approach in which each branch of each bank was allotted certain number of villages for absolute development of each village, each Panchayat under their service area. For this purpose each bank along with Block Development Officer (BDO) and Lead District Manager of each district use to frame service Area Plan in the month of January for the next financial year.

Such plan is approved by initially BLBC (Block Level Bankers Committee) and then by DLCC (District Level Consultative Committee). Execution of such annual plans is monitored by BLBC, DLCC and finally by SLBC. It is unfortunate that even after making more than 30 annual plans and monthly monitoring of the execution of plans by DLCC as also by SLBC , there is no actual development in the villages and it is pity that still villagers have to depend on local money lender for micro finance. Crores of rupees are spent every year in administrative expenses in implementation of said Lead District Plans and Service Area Plans

It is ridiculous that after lapse of more than three decades of lead bank approach and Service area approach, lenders are requesting Reserve Bank of India (RBI) to allow them to freely decide interest rates on loans below Rs 2 lakh to enable them

reach out to unbanked sections which are presently serviced by microfinance institutions and money lenders at high rates. It is rightly apprehended that interest rate will go up for finance made upto Rs.2.00 lacs to farmers. Banker however pleads that even the increased rate will be competitive with interest rate charged by local money lenders.

I would like to emphasize here that rates charged by banks for loan upto Rs.2.00 lacs is fixed by RBI and it is restricted to BPLR ( Benchmark Prime Lending Rate which varies from11.5% to 14.5% from bank to bank). It is worthwhile to mention here that bankers in general do not hesitate in financing to Corporate, big traders and manufacturers at rate much lower than BPLR rate.

I like to point out here that banks in general normally charge interest ranging from 8 to 9.5% on Home loans, 10 to 11.5% on vehicle loans, 9.5 to 11.5% on Education loans, 7 to 10% on export loans and so. It is bitter truth that more than three fourth of banks lending is at rates less than BPLR under corporate lending or retail lending schemes. Not only this banks are offering one after other discounts on such lending which is rates much lower than BPLR to increase their market share .Even RBI has been suggesting bankers from time to time to further reduce interest rates on vehicles and home finance to increase demand in the market.

I am unable to understand why bankers are demanding freedom for deciding interest rates for farmers.
Do they want to exploit the villagers in the same as money lenders?
Have they discarded the idea, objective and vision of Service Area Approach?
Have they honestly executed last thirty plans and more framed during last thirty years?
Are they ridiculing social objective of government of India?

As a matter of fact bankers have been charging more interest on loans upto two lacs in comparision to loans given to other sectors mentioned above.

Do they want to earn profit from small traders and give discount to big borrowers?

It is true that RBI will not agree to such proposals of the banks in fear of sharp public reaction against increase in interest rates for small loans. But demand made by banks for freedom to decide rate for small loans points towards their real attitude in lending to small borrowers. Their plea to give relief to small borrowers from local money lenders is nothing but deceptive and unreliable.

Demand for freedom made by bankers is against the core objective of bank’s nationalization, Lead Bank approach and Service Area Approach. Not only this it also proves that bankers and government agencies have been simply befooling villagers in the name of service area approach for last three decades and more and the ground reality is that small villagers are still facing exploitation in the hands of money lenders.

Now everyone is talking of Social Inclusion. Political leaders advocate social inclusion when they frame their political manifesto. Ministers cry for Aaam Aadmi when they deliver speech to attract voters. Economists and Banks sympathize poor villagers. Are they shedding crocodile tears for poor and small borrowers?

Mere opening of Zero Balance Accounts in bank or distribution of Rs.300 or Rs.400 as pension to old people cannot serve the purpose of social inclusion. Bankers need to come forward to extend small sized lending at rate lower than BPLR and to make up this loss they should charge a little bit higher rate on lending made for purchase of vehicles, flats , real estate developers and also to big manufacturers, exporters and other service providers and big merchants. Objective of social objective can be fulfilled not by greedy politicians but by bankers.

Moreover it must be kept in mind that if small traders and small farmers do not survive and do not leave in peace, the very existence and rise of big traders, corporate houses, industrialists and exports will be at stake. Entire capitalistic approach of ruling government will be proving disastrous when mass movement and violence is resorted by exploited class of people to demand justice and for their survival.

“Marta kya nahin karta”

Danendra Jain
23rd December 2009