Ensure Share of RBI Income to Strengthen NABARD’s National Rural Credit Fund, Enhance Cheaper Credit Flow to Revive Agri-Sector: AINBEA

The All India NABARD Employees Association (AINBEA) has called on the Government of India to channelize 8-9% of the Reserve Bank of India’s (RBI) income to the National Rural Credit (NRC) Long-Term Operations (LTO) and NRC Stabilisation funds. This demand aims to ensure a more affordable credit flow to the rural agricultural sector through cooperatives and regional rural banks (RRBs).

Demand for Concessional Funds

National Bank for Agriculture and Rural Development (NABARD), founded in 1982 as India's apex development bank, has been an influential pillar in the rural economy through agri-finance, infrastructure, banking technology, microfinance, and entrepreneurship. NABARD Employees Association has now passed a resolution urging the government to adhere to Sections 42 and 43 of the NABARD Act of 1981. These sections stipulate that a portion of RBI’s income should be allocated to NRC funds. The proposed allocation would amount to approximately Rs. 22,000 crore to Rs. 25,750 crore annually, based on RBI’s income of Rs. 2.75 lakh crore in the fiscal year 2023-24.

According to AINBEA, the practice of allocating 8-9% of RBI’s income to NRC funds continued until 1992, when it was halted and redirected to the government to help manage its fiscal deficit. This change, AINBEA claims, directly contravenes the NABARD Act, 1981, and Section 46A of the RBI Act, 1935.

RBI’s recent transfer of a record Rs. 2.11 lakh crore of its income to the government of India had sparked criticism for over-dependence on RBI dividends to tackle fiscal deficit.  

NRC Fund Utilisation

The NRC (LTO) fund is primarily used by NABARD to provide financial assistance in the form of loans and advances to RRBs, cooperative banks, and other entities. These funds are then used to refinance long-term loans issued for agriculture, allied activities, and the rural non-farm sector. Additionally, the NRC (Stabilisation) fund provides medium-term loans to approved financial institutions, allowing them to convert short-term crop loans into medium-term loans. This mechanism is especially crucial in the aftermath of natural calamities resulting in crop loss, such as droughts and floods, enabling farmers to secure fresh loans.

Diminishing Rural Credit

The diminishing share of rural credit available through the cooperative sector, which accounted for around 12% of the total ground-level agricultural credit distributed in the country in 2022-23, is forcing many poor farmers to rely on informal channels. These include money lenders and high-interest non-banking financial companies (NBFCs). AINBEA stresses that NABARD is mandated to strengthen the rural credit delivery mechanism, particularly for small and marginal farmers, to promote sustainable development

In its resolution, AINBEA also demanded that NABARD be exempted from paying income tax. The association argues that the funds saved from this exemption could be redirected to provide cheaper credit to the rural agricultural sector.

Higher Interest Rates Explained

Speaking to Kanal, K P Baburaj, the secretary of AINBEA highlighted the significant policy shift in 1991, which marked the inception of liberalisation policies. He noted, “Allotting up to 9% of RBI's income to the NRC LTO and NRC stabilisation funds was the practice back in the day till 1991. Rs. 420 crore was thus allotted in 1991. As the government retreated from the market with the inception of the ‘new economic policies’, this allotment was cut short to 1 crore every year since then.”

Baburaj further explained, “The balance sheet size of NABARD today is over Rs. 9 lakh crore (as of 31 March , 2024). Out of this, NABARD’s own fund is less than 10%. This means that NABARD borrows around 90% of the money it supplies or refinances to cooperatives and RRBs. This explains the higher interest rates for rural credits, including those in the agricultural sector in recent times. The rural population, particularly peasants and farmers, are the ones who are directly hit.”

Under the motto “Enhance Low-Cost Credit Flow, Save Farmers, Strengthen NABARD”, AINBEA has resolved to take this long-pending demand forward with the NABARD management, RBI and the Union Finance Ministry. The association is expecting a favourable response from authorities to fulfil their demand.