The inter-connection of infrastructure with economic growth paves the way to focus on creation of rural and urban infrastructure for the overall development of a country. Considering its importance, the Union Budget of 1995-96 created the Rural Infrastructure Development Fund (RIDF) to be operated by National Bank for Agriculture and Rural Development (NABARD) with an initial corpus amounting to ₹ 2000 crore (RIDF-I).
Dr. Manmohan Singh, the then Hon’ble Union Finance Minister, while announcing the establishment of the RIDF stated the following: “Inadequacy of public investment in agriculture is today a matter of general concern. This is an area, which is the responsibility of States. But many States have neglected investment in infrastructure for agriculture. There are many rural infrastructure projects, which have been started but are lying incomplete for want of resources. They represent a major loss of potential income and employment to rural population.”
The cumulative allocation now stands at ₹ 4,58,410.71 crore, including ₹ 18,500 crore under Bharat Nirman for 2022-23 (RIDF-XXVIII). As per the list approved by the Government of India (GoI), a total of 39 activities are eligible to be funded under RIDF which are classified under three categories:
- Agriculture and related sectors (RIDF loan: 95%)
- Social Sectors (RIDF loan: 85%/ Hill & North-East States: 90%)
- Rural Connectivity (RIDF loan: 80%/ Hill & North-East States: 90%)
According to NABARD guidelines, the institutions which are eligible to be funded under RIDF includes State governments/ Union Territories, State owned corporations/ undertakings, State government sponsored/ supported organizations, Panchayati Raj Institutions/ Self Help Groups (SHGs)/ Non-Governmental Organizations (NGOs).
The underlying principle under the scheme is that the eligible banks have to mandatorily transfer their shortfall in Priority Sector Loans (PSLs) to NABARD for subsequent funding to the eligible institutions as mentioned above. This implies that the banks are pressurized to complete their required quotas under PSL as the interest rate received under RIDF deposits is lower than the lending cost under PSL category, which leads to lower returns for the banks. With effect from April 01, 2012, the interest rates received by the banks for RIDF deposits have been aligned with the Bank rate prevailing at that point in time.
Source: RBI Handbook of Statistics on Indian States and Authors’ Compilation
As evident from Table 1 above, RIDF has achievement significant milestones with respect to number of projects, amount sanctioned and cumulative disbursement. The number of projects involved has significantly increased from 4168 in 1995-96 to 36593 in 2021-22. As on December 31, 2022, the cumulative amount disbursed has reached ₹ 3,70,920 crore which is about 78% of the total sanctions amounting to ₹ 4,73,660 crore. The sector-wise cumulative RIDF sanctions includes 43% for the Agriculture, Irrigation and allied sectors, 21% for the social sector and 36% for the rural roads and bridges.
PROS AND CONS
The implications of RIDF projects can be enumerated as follows:
- The scheme has provided for an escape route for the involved banks as they are not required to peruse mandatory loans under the Priority Sector Lending (PSL) which includes cost-benefit analysis, project appraisals, forecasting cash-flows, etc. The shortfall can just be parked with NABARD under RIDF to earn risk-free interest rate. This has the potential for the deficit to continue on an everlasting basis.
- Historically, the major source of finance for the State Governments has been Union Government grants/ loans which is provided with a spread above the Bank Rate. However, the entire design structure of RIDF is to provide concessional loans to rural infrastructure projects priced at negative spread with respect to the Bank Rate. RIDF has become an attractive source of funding for the State Governments.
- With an additional source of funding for the State Governments in the form of RIDF loans, it has not only benefitted the Union Government with a focus on reduction in the fiscal deficits but also brought down its interest subvention/ subsidy amounts which is an integral part of various PSL advances. Thus, the Government of India has been rewarded with an intangible advantage in the overall RIDF scheme.
- The most negatively affected stakeholders are the farming community as the funds supposed to be directly earmarked for them; ultimately lands into the hands of the State Government. This, in turn leads to lower investment in agriculture and pushes the farmers towards the non-institutional money lenders with higher cost of debt. Though the money provided to the States under RIDF are used for the rural infrastructure projects but the eventual effect of these are longer term in nature. Agriculture and allied activities need short term and medium term investments for its overall growth. The dilution in the definition of the PSL norms over the years have channelized the required funds towards the organized sector; whereas the small and marginal farmers are an unorganized community. Out of a total working population of 48.17 crore, 14.43 crore are still agricultural laborers and 11.87 crore are cultivators, i.e. agriculture and allied sectors employ around 55% of the total working population of the country (Census 2011). This indirect method of depriving the farmers from their earmarked share of credit has done considerable damage to the system of distributional justice.
- PSL advances comprises of large number of small ticket sized loans which involves considerable amount of credit risks. Together with the number of activities included for the horizontal and vertical expansion of PSL regulations, a large amount of advances is concentrated at the upper end of the borrower spectrum leading to the crowding out phenomenon for the genuine debtors. In view of the above, considerable damage has been caused to the agricultural sector which plays a unique role in the development of the Indian economy due to its involvement in alleviating poverty and potential to provide livelihood to vast section of the population.
POLICY IMPLICATIONS/ GUIDELINES
- The regulators in the country should implement in practice the basic idea behind the introduction of RIDF. Shortfall in PSL advances should be an exception and not the norm. The tendency for this overall RIDF scheme should be to focus on expanding over broadening so that the credit is absorbed towards those for which it is intended to.
- The agricultural community is already in the clutches of the unauthorized money-lenders who charge exorbitant rates of interest. For the farmers, the availability of credit is far more important than the cost of credit. The higher transaction costs to process small loans and the higher incidence of Non-Performing Assets (NPAs) in this domain calls for charging base rate in addition to borrower specific charges. This in turn may indirectly help the governments in reducing their interest subvention bills to these sectors.
- As per definition RIDF money is utilized by the State Governments for the creation of rural infrastructure projects. However, for the effective utilization, ‘investment in agriculture’ should be preferred over ‘investment for agriculture’ and funds for infrastructure projects may be granted through additional budgetary resources rather shortfall of reserves from priority sector advances.
- NABARD’s RIDF has resulted in substantial advantages viz. projects being implemented more expeditiously by the State Governments, addition irrigation potential, creation of jobs, less cost over-runs, etc. Moreover, unlocking of investments and thereby realizing the full benefits of the projects has helped in the growth of core sectors in the rural areas.
- Continuing in the same lines, the Honorable Finance Minister in the Union Budget 2023-24 has announced the creation of Urban Infrastructure Development Fund (UIDF) of ₹ 10,000 crore per year for creating infrastructure in Tier-2 and Tier-3 cities. The fund will be established through use of priority sector lending shortfall and is proposed to be managed by the National Housing Bank (NHB). Tier-2 cities are those which have a population range of 50,000 to 100,000 and Tier-3 cities are classified as those with a population of 20,000 to 50,000. The guidelines for the allocation of funds are to be provided by NHB, RBI and Ministry of Housing & Urban Affairs tentatively by the end of March 2023. As there is huge requirement of funds for the fulfillment of the Sustainable Development Goals (SDGs), the introduction of UIDF is very apt and timely for utilizing the earmarked funds for creating low carbon-footprint projects and focusing on climate change mitigation/ adaptation risks.
(Views expressed in the blog are personal and not of any organization/institution)
By Mr. Saugat Das & Dr. P. K. Singh; ARF group members
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