Chennai, July 11: Rural credit institutions must be mobilisers of funds as well as lenders. They must ensure that lending rate compensated operating costs, said the Reserve Bank of India (RBI) governor C Rangarajan here on Friday.

Otherwise, the very viability of these institutions would be at stake, he said. Rangarajan said this while delivering the inaugural address at the Conference on Banking for Agriculture and Rural Development, a three-day event organised by the International Centre for Research in Money and Banking (ICRM).

Rangarajan went on to say that the recovery performance of the rural financial institutions had been far from satisfactory, with overdues pervading the entire structure.

Inadequate attention to the qualitative aspects of lending by rural financial institutions had resulted in loan defaults and a deep erosion of repayment ethics.

There was an immediate need for revitalising the rural credit institutions, the governor said and added that three factors needed to be emphasised in this regard.

"Many institutions have seen a substantial erosion of capital and suitable recapitalisation mechanisms will, therefore, have to be evolved," he said.

This should, however, be preceded by policy reform and operational changes, he said.

The second step in the revitalising process was the need for a more conducive climate for the recovery of dues. Third, and most important, the institutions had to mobilise funds through deposits and other sources.

There was an immediate case for these outfits to move away from their present emphasis on borrowings, he said.

``A better appraisal of lending, stress on mobilisation of rural savings, restoration of democratic process and operational diversification should be the constituent elements in any future programme of action,'' Rangarajan said.

Earlier Vedagiri Shanmugasundaram, Member State Planning Commission and Director of ICRM, said in his presidential address that the World Bank's prescription to cut subsidies across the board had to be re-examined and applied case by case. There must be a farm lobby, Shanmugasundaram said and its growth was essential for the development of the farm sector.

He further said the RBI had to evolve into an independent body like the Federal Reserve system of the US.