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priority sector since the earlier Report of 1991, it itself proposed “that given
the importance and needs of employment-oriented sectors like food processing
and related service activities in agriculture, fisheries, poultry and dairying,
these sectors should also be covered under the priority sector lending” (p.26).
Subsequent to the Narasimham Committee I or II, many committees and
study groups have been confronted with the question of the continued need
for directed credit arrangements for agriculture and allied activities in the
face of the relative decline in the GDP share of the sector. Everyone of them
has felt the need for the system of directed credit for agriculture, but differed
on the method to be adopted for achieving the objective. In 1995, after the
Narasimham Committee I (1991), the RBI appointed a High Level Committee
on Agricultural Credit through Commercial Banks (R.V. Gupta Committee). The
Gupta Committee proposed a novel method of self-set targets for agricultural
lending by commercial banks themselves but based on the flow of credit. The
banks were required to prepare
Special Agricultural Credit Plans
(SACPs),
with the RBI indicating every year the expected increase in the flow of credit
over the previous year. The Committee felt that once such SACPs were in place,
the 18% target based on outstandings would cease to have much relevance.
The R.V. Gupta Committee did express misgivings about the 18% target
on two counts. First, the target based on outstandings had the drawback of
failing to accommodate the effects of improved recovery and write-offs. The
combined effect of better recovery and write-offs was to statistically reduce
the share of lending to agriculture in total credit, though the pace of lending
may not have slowed down. Secondly, the target of 18% for agricultural credit
was fixed when the reserve requirement for banks was 63%. With progressive
reductions in reserve requirements and consequential increases in lendable
resources of banks, the base on which the 18% target is measured would go
up. The Committee estimated that this base had doubled and hence the banks
would have to double their size of lendings to agriculture to sustain the pre-
determined share.
In reality, the R.V. Gupta Committee’s misgivings cited above, turned
out to be specious arguments against the 18% target for agriculture. In the first
place better recoveries and write-offs are not a perennial feature; they occur
sporadically and in special circumstances. In situations of drought and poor
agricultural crops, recoveries slide down, and such are the times when the
agricultural sector requires higher credit support. As for the higher base of
lendable resources, the question of inter-sectoral equity comes into play. Why
should the system allow the increased bank resources to be set against only
