II. The RRB’s lending policies

Before examining the actual distribution pattern of the selected RRB’s loans, an attempt is made in this section to understand the nature and type of its lending as revealed by the purpose-wise and security-wise distribution of its loans. A broad clue as to what could be the actual distribution pattern of the RRB’s loans is obtained by such an analysis.

The TGB has been extending two types of loans namely, direct and indirect loans. The direct loans are those given by the branches directly to the borrowers. Whereas indirect loans are given to the borrowers through 19 farmers’ service cooperative societies adopted by the bank. Such indirect lending accounted for about 15 percent of the total loans outstanding during 1988-89. However, the purpose-wise composition of the indirect loans is not available from the records of the bank except that these loans are found classified as agricultural loans. Given their emphasis on target group lending, the indirect loans of the RRB’s in a way went against their basic principle because the cooperatives do not have such specific emphasis. Also since the cooperatives have been known for their dominance by big farmers, the practice of indirect lending amounted to diversion of the funds of the RRBs meant for the weaker sections to the rich. The selected RRB in order to ensure that its indirect lending did not dilute its basic spirit of target group lending was therefore found to be insisting that such cooperatives enroll more members belonging to weaker sections.

Coming to the direct lending, Table 1 gives the purpose-wise composition of TGB’s direct loans outstanding and disbursed at the end of and during 1988-89 respectively.

The direct loans of the TGB fall broadly under seven purposes. Among them loans given for agricultural purposes consisting of crop production, agricultural investment and agricultural allied activities put together accounted for the major share. The loans given for crop production accounted for the highest share with nearly 40 percent of both loans outstanding and disbursed during 1988-89. The crop production loans are short term loans given for various seasonal agricultural operations. On the other hand, agricultural investment and allied activity loans are term loans given for purposes like development of minor irrigation, for purchase of farm equipment and draft animals, and for pursuing activities like dairying and sheep and goat rearing.

Table 1. Purpose-wise Distribution of the Tungabhadra Gramin Bank’s Direct Loans, 1988-89 (in percentage)

Source: Tungabhadra Gramin Bank

Among the non-agricultural purposes, loans given for trade, business and service are the major category. The other non-agricultural category is the loans given to rural artisans and industry. The loans under these two non-agricultural purposes are given for meeting both working capital and investment needs. Besides these production loans, the bank also lends for non-production purposes. The consumption loans and loans specified as ‘others’ come under this category. These two loans are classified in the bank’s portfolio as non-priority sector loans. The loans specified as ‘others’ include mainly loans given on the security of deposits kept in the bank. It could be observed from the various annual reports of the RRB that in recent years it has been trying to lend more of its funds to various non-agricultural purposes particularly those which come under the non-priority category. This was found to be mainly because the non-agricultural loans not only had better recoveries but also fetched relatively higher interest rates. The increasing operating costs and higher loan delinquency rates had compelled the bank to adopt such a strategy.The nature of the RRB’s lending policy may be further understood from Table 2 which gives the securitywise classification of its loans. The loans of the bank are sanctioned on the basis of four types of securities namely, land, gold, deposits, and hypothecation of assets and personal security. A major share of the total loans of the TGB is accounted for by loans which are given on the basis of collateral of land, gold and deposits. In other words, the RRB has followed mainly collateral-based lending. The loans given on the basis of these three collaterals accounted for about 61 percent of the loans outstanding and 67 percent of the loans disbursed during 1988-89.

Table 2. Distribution of Tungbhadra Gramin Bank’s Direct Loans by Type of Security, 1988-89 (in percentages)

Source: Worked out from the annual report and other unpublished statements of TGB.

The loans given on the basis of hypothecation of assets and personal security also have accounted for a significant share of the TGB’s loans. During 1988-89 their share in the total loans outstanding and disbursed accounted for about 40 percent and 33 percent respectively. Under this category a loan is supposed to be sanctioned without any primary collateral. In the case of investment loan, the asset purchased out of the loan is hypothecated to the bank till the loan is repaid. In the case of working capital loans, only the personal security of the borrower is taken. However, an analysis of the composition of personal security and hypothecation loans and the actual basis of sanction adopted by the bank brings out their real nature and also the bank’s policy towards such loans.

A considerable number of loans sanctioned on the basis of hypothecation and personal security are loans which come under various credit-based poverty alleviation schemes like Integrated Rural Development Programme (IRDP). Under these schemes the loans are to be sanctioned to the households selected by the government authorities without insisting on any collateral. All the credit institutions in fact are required to lend compulsorily to such borrowers. It could be observed from the working of the RRB that its lending to those who cannot afford any security was virtually restricted to such programmes.

Although on paper no collateral except hypothecation of assets or personal security is to be considered, for loans other than those coming under poverty alleviation schemes in practice it was found that the bank was sanctioning such loans only to those who have borrowed some secured loans by pledging land or gold or maintaining some term deposit in the bank. In other words, the bank was considering the collateral of a loan already sanctioned or deposit held in the bank as indirect security for giving loans under unsecured category. The security so considered was only tacit and not formal.

Thus the bank has followed mainly collateral-based lending except in the case of poverty alleviation schemes under which it is compelled to lend without insisting on any collateral. As a result, to obtain a loan from the RRB a borrower should possess either land, or gold or deposit or should be a beneficiary under a government scheme. This implies that households without assets or suitable collateral get automatically rationed out or denied access. In the sections that follow an attempt is made to understand the distributional implications of the above mentioned lending policies of the RRB.