When Mohammed Pervez, 25, wanted a small loan to buy a cartwheel and start his own small business of selling fruits, none of the 14 public-sector bank (PSB) branches in his town, Deoband in Uttar Pradesh, was eager to lend. After battling cumbersome procedures, he turned to the Muslim Fund Trust, which readily helped him. (See related story for more on Muslim Fund Trust).

Pervez is not alone. People from minority communities like his find it very difficult to get start-up credits.

After the Sachar committee report on the socio-economic situation of Muslims highlighted the need to extend banking services to the community, in June 2007 the UPA government went ahead and set a target for PSBs: they were to earmark 15 percent of the priority sector lending (known as PSL, target: 40 percent of the overall) for all religious minorities.

However, six years later, only 11 PSBs have achieved the target, going by the data for the quarter ending September – more about which below (also see tables). Taking a serious note of the situation, the Reserve Bank of India (RBI) on July 1, 2013 issued a master circular to the heads of all scheduled commercial banks to ensure the lead banks of the 121 ‘minority districts’ (where the minority population is more than 25 percent of the total) take proactive measures to provide bank credit to minorities. The circular said, “Names, designation and office addresses of the officer-in-charge of the special cell at head office and officer appointed by Lead Banks in the identified districts (minority) to look after exclusively the problems of minority communities, should be furnished by banks to the National Commission for Minorities (NCM).”

Six months down the line, the banks have done no follow-up. “We have not started receiving such reports so far from the lead banks of such districts,” says Wajahat Habibullah, chairperson of NCM.

The NCM, he says, often receives complaints in this regard from people. “If I get a call, I put them in touch with the organisations working with them. There are a number of organisations promoting banking – like opening bank accounts – for these minority groups,” Habibullah says.

The New Delhi-based NCM has also organised events on financial inclusion for minority communities.

“If a case of deliberate discrimination comes to our notice, we take action. If it comes (out) in the media, we still take suo motu action against them (banks),” he says. “They must give loans to those who satisfy credit criteria. Often a person can’t produce proof of credit-worthiness. But banks should reach out to these sections of people.”

Are minorities discriminated against? Yes, possibly, but Habibullah also points out that it is difficult to prove discrimination.

Muslims at disadvantage

The Muslim community, which forms 72 percent of India’s total minority population, suffers the most in terms of bank loan approvals, according to figues propvided by the ministry of minority affairs. The data for the quarter ending June 2013 show Muslims received Rs. 87,603 crore, or just 47.98 percent, of the total minority community lending (MCL) – far lower than their proportion. Sikhs, who make up 10.13 percent of the minority population, received 25.99 percent, while Christians, constituting 12.71 percent of the minority population, got 23.35 percent of the total credit.

Syed Zafar Mahmood, a former Indian Revenue Service (IRS) officer who served as the officer on special duty (OSD) to the Sachar committee, is disappointed. He says, “A simple circular does not matter. It will not have any impact unless things are followed up regularly on the matter of providing banking services to Muslims who suffer the most among minorities. The banks are not following the guidelines properly.” He adds that the committee itself recommended that banks should open in areas in minority-concentrated districts.

Dismal performance

Finance minister P Chidambaram seems well aware of the situation. Addressing the quarterly review meeting on October 22 in New Delhi, he warned the bank heads, “Those banks which are falling short, I have told them you have to increase your lending to the minority sector by at least 2 percent over last year so that average moves up to 15 percent. We have identified the banks and told their chairpersons that we are watching you very carefully.”

Notwithstanding the warning, only three PSBs improved their tally in the quarter ending September. The overall average of the PSBs is still 14.93 percent – a bit short of the target. Eleven PSBs have not met the target (five of them are in single digits), and Mumbai-headquartered IDBI Bank is the worst performer among 26 PSBs. Though IDBI claims to have a minority cell, it has lent only 4.24 percent of its priority sector lending to minorities.

Pradeep Shankar, a former CMD of State Bank of Indore, argues that banks fail to meet the MCL target because most of their branches are in urban and commercial areas.

“The banks are still not actively opening branches in minority-concentrated areas. IDBI Bank is predominantly concentrated in urban areas. So it regularly fails to meet the target of MCL,” says Shankar, now a director at Resurgent India, a financial services company.

“Banks have informally marked some areas as negative in terms of doing banking, which aggravates the situation for the minority groups,” says Abdur Raqeeb, general secretary of the Indian Centre for Islamic Finance (ICIF), which is creating awareness among stakeholders. However, some banks are indeed taking the FM’s warning seriously and making extra efforts to lend to the minorities.

Amar Habibullah, co-founder and director of TransServ Pvt Ltd, admits that PSBs these days are flexible in implementing schemes targeting minorities. His firm, active in opening zero-balance accounts for implementation of direct benefits transfer (DBT) in unbanked areas, works with Bank of India (BoI) in pushing for financial inclusion for all groups, including minorities. During the quarter ending June 2013, BoI’s MCL was in single digit (7.84 percent) but in the next quarter it doubled to 15.84 percent – the highest improvement for any bank.

Of course, Amar Habibullah admits that the rules and regulations often create problems. “Before providing loans, banks actually see deposit and withdrawal of the loan seeker,” he says. “There is a lot of paperwork involved.”

Advocating Islamic banking in India

Many argue that banks alone are not to be blamed for the situation – sections of the Muslim community, too, are averse to banking, since the Sharia prohibits earning or paying interest. NCM chief Wajahat Habibullah says: “It is a fact that Muslims are not getting loans. But there are also large sections of the community who are not approaching banks for loans because the loans are not interest-free, which according to them is un-Islamic.”

The NCM, he says, supports the demand for interest-free banking for Muslims. “We feel it is a necessary component of banking,” says Habibullah, whose three-year tenure with the commission ends in January.

Mohammed Saqib, who formed the Muslim Business Chamber (MBC) on the lines of Dalit Chambers of Commerce and Industry to provide financial empowerment and mainstreaming Muslim entrepreneurs has a different take. “The Muslims are not capable of taking bank loans. On what basis will they get loans if they don’t have proper identity papers with them?” he asks.

RBI governor Raghuram Rajan underlined the need to push interest-free banking for the Muslim community when he headed the committee on financial sector reforms constituted by the planning commission in 2008. However, the proposal has not made any headway despite active interest shown by the ministry of minority affairs.

There are some initiatives from the private sector. For example, the Kochi-based Cheraman Financial Services, which received RBI permission in August to operate as a non-banking financial company (NBFC), follows Islamic principles in offering leasing and equity-finance products under Islamic principles.

The new plan

PSBs, meanwhile, are surely waking up to the commercial potential as well as social responsibility and taking minority lending seriously. During April-June 2013, PSBs opened 140 branches in the 121 ‘minority districts’ with State Bank of India and Syndicate Bank opening more than 20 branches each in such districts.

Meanwhile, the UPA government has a more ambitious plan to extend banking to the minorities. It has fine-tuned the concept of ‘minority districts’ to ‘minority community blocks’ in the 12th five-year plan. A block with more than 33 percent of minorities in its total population is defined ‘minority concentrated block’ and 710 such blocks have been identified.

“In the minority districts, the benefits of (government welfare) programmes were not going to minority communities. They were going to everybody but minorities,” says Habibullah. “Now banks will have to expand activities in these blocks. This way, many more areas will come into the banking fold.”

(This article appears in the January 1-15, 2014 print issue)