2. Banking in India: Some Features
• Banking played a vital role in the modern capitalist development. Banks
played a critical role in making large scale industrialisation possible.
• In India, public policy a pivotal role in developing banking system. The
nationalisation of 14 major banks in 1969 is major policy decision that
defined the destiny for Indian banking system, in terms of size, spread,
mobilisation of savings and delivery of services.
• The fact that Indian banks lent money to not just a big borrower, but
even to a small peasant or small scale enterprise or a self-employed
person – today we call this as financial inclusion, is achieved four
decades roughly ago.
• Bell and Rousseau (2001) in a study brought out the extent of success of
out banking system in promoting investment and output; also a finance
led-industrialisation. Historically, banks in UK lent only working capital
and encouraged firms to raise fixed capital in stock market. In the
aftermath of 1930 depression, much of Europe turned to bank-financed
process. India too followed this cue.
3. • Burgess, Pande and Wong (2004) conclusively proved that the
state-led branch expansion in rural un-bankable locations reduced
poverty across Indian states. They further observed that the
branch licensing rules existed in 1977090 caused banks to open
more branches in Indian states with lower financial development.
This proves that the rural branch expansion during 1979-90
significantly reduced poverty and increased non-agricultural
output.
• Financial policies of 1970-90 followed supply-side strategy,
resembled endogenous growth strategy in which finance itself is a
crucial factor like knowledge to promote growth.
• The faster agricultural growth in 1980s and also that of
unregistered manufacturing output both owe largely to factor of
acceleration of regional, sectoral and distribution of credit.
4. Post-reforms banking
• After and during the Liberalisation, each of these policies of rural
expansion, spread of credit to all classes, regional expansion are
criticised on the basis of cost-effectiveness and these policies received
a set back.
• Of course, it is true that the unprecedented growth of banking prior to
1990s also brought alsong serious drawbacks reduced critical mass,
non-performing assets, insufficient loan-loss provisions and other
organisational weaknesses.
• In the light of the weaknesses and flaws, the positive aspects cited
above began to wear thin. Thereafter, the post-reform banking system
faced challenge of cleaning up and consolidation of operation in an
entirely new competition environment and reform enthusiasm.
• Banks were also entrusted with whole range of parabanking activities
such as merchant banking, housing finance, mutual funds, insurance,
and others. Personal banking and universal banking are the punch
words.
• The Narasimhan Committee (1994) recommendations had fareaching
implications on the economy.
5. Post-reform Developments in Credit Scenario
• In 1969 there were 8000 branches, by 2007 there are 68,680 branches.
Bulk of the expansion took place in 1970-90. During 1970-90, the
average branch expansion was 2550 per annum, it is brought down to
464 during 1990-05 (one sixth).
• Is it because we have exhausted the need, not at all. This is due to policy
shift. In 1990, rural branches constituted 35,000 (57%), there were
brought down to 33,017 in 1996, to 30,572 (44.5%) in 2005. Semi-urban
banks share is also brought down from 40.8% to 22.2% during the same
time.
• Narasimhan Committee Report suggested that each of PSB should have
a rural subsidiary and takeover all RRBs. It wanted to bring down the
complexity in the structure, so that restructuring becomes easy.
• Post-Reform RBI unit that monitored branch expansion was wound up.
decision to expand was left to commercial judgement of the bank.
• Banks are allowed to close their non-viable rural branches and maintain
a mere extension counters or close the branch if already two PSB having
branches in a village. Given an option, PSBs do not open any more
branches in rural areas which are backward.
7. The Effect
• The credit-deposit ratios a in rural areas a result have fallen from a peak of 68%
during 1970-90 to 36% during 1991-05.
• The average loan size which was Rs.5 lakhs jumped to Rs.30 lakhs, which means
banks have resorted to their inherently commercial nature of lending to big
borrower. The increased loan size can be placed in the larger picture of
decreased rural lending. The share of small borrower credit has falled from 25%
to 3.5%.
• A significant point to note with regard to inter-regional disparities, the reduction
that took place in the first two decades of banking nationalisation, has been
reversed in the 1990s in both sanction and utilisation. There is some
improvement after 2005 but that is due to increase in personal loans and other
retail sector loans.
• The number of districts with 60% C-D ratio have gone up from 136 in 1980 to
209 in 1985. But during the number of districts with less than 20% C-D ratio
have gone up from 105 to 505 during 1990s.
• In 1990 credit absorption capacity of underdeveloped regions seemed to have
gone down manifesting in lower C-D ratios in rural areas. To mitigate this
situation, banks to investment securities and bonds of state governments and
second in rural infrastructural development fund with NABARD for irrigation
works.
8.
9. Bank credit to Agriculture
• The major achievement of banking nationalisation in 1969-74 was
a decisive shift of increase in agricultural share in total credit. It
was meagre 3.5 % in 1960s, it was taken to 18% in 1989 (against a
priority sector target of 30%).
• In 1990s the target itself was revised downwards to 18% but the
actual credit has fallen to 10% in 2005. No wonder so many
farmers started committing suicides since 1997.
• Though the share of agriculture in GDP has falled from 39% in
1980-81 to 31% in 1991, 22% in 2004-05, (now 14.5% in 2010),
credit target was set less and realised credit was less than half of
its GDP. In fact, the income share should not be the criterion at
all, it should be number of persons dependent on the sector, a
sector that hosts 56% of workforce receives 10% of bank credit!
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11.
12. • The share of cooperative credit has gone done down from
70.8% to 33% 1975-05 and the commercial bank credit share
gone up from 24% to 69%.
• The share of term loans from cooperatives fell from 22% to
6%. But the outreach of agricultural cooperative banks is four
times more than scheduled commercial banks. They also are
scale neutral, hence more democratic.
• Cooperative banks also had more freedom in rescheduling
loans than commercial banks have. Hence defaulters during
the crises period lose the access to institutional loans.
However, the PACs were subjected to heavy political
interference, thereby loan recovery had suffered. Since they
did not invest much in deposit mobilisation, many PACs
became defunct. They also could not get refinance from
NABARD and cooperative credit in the country is on a death
bed.
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14.
15. • The share of rural sector in the total scheduled bank credit has been
at 18% in the recent times. One should not mistake that all this is
going agriculture, it is rather termed an indirect credit, which
supposedly working in the interest of farmers. 10% of this belongs to
indirect credit which goes for microcredit, rural retailers.
Radhakrishna Committee on Agriculture
• Radhakrishna Committee on Agricultural credit noted that 48 percent
of the farmers do have access institutional credit. Moneylenders are
financing 47% of agricultural needs, this used to be 30% in 1980s, we
have gone back to 1970 situation. There is a desperate need to beef
up agri credit atleast to 18%.
• They pleaded for distinction be made between irrigated and
unirrigated areas. They recommended interest waiving policy in
rainfed areas during droughts, financial burden be borne by the
centre and state. They also recommended a reduced interest rates
and extend SHG model to farmers.
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19. Credit to Other Small borrowers
• After agriculture, SSI sector occupies a central position in terms of
employment and output. Promotion of small scale entrepreneurship is
also a democratic obligation. In the previous regime, lending to SSI
sector was possible since they are scattered all over the country.
• however, after banking reforms, SSI share of credit took a beating, it
came down from 13.5% in 1991 to 4.5% in 2005. part of the reason is
the small scale industry definition is changed.
• However, there is a definite decline in the momentum in distribution
of bank loans to small borrowers and vulnerable groups.
• In 1972-73, number of borrowers with less than Rs.10000 loans were
21.2 millions, 38 millions in 1990, it came down to 13.5 millions in
2003. (from 80% to 32%)
• 80% of small borrowers are from rural areas.
• Though the share of woman loan accounts have gone up (due to SHG
movement), the share of SCs and STs have gone down.
20. Micro Credit
• Now micro credit has come up in a major way in the country and
banks are involved in a big way. The idea of microcredit is
supposed to be based on Grameen Bank experiment in
Bangladesh.
• Theoretically, when good borrowers are excluded from credit
market due to not having collaterals, the joint liability principle
can serve as collateral. This supposedly can be a remedy adverse
selection and moral hazard.
• Again microcredit has two streams (i) SHGs and (ii) microfinance
or MFIs. SHGs has thrift component as well as low interest plus
empowerment components. They led even social movements
such as anti-liquor movement, leadership and capacity building,
health and AIDs campaign. MFIs are purely commercial, giving
small loans at very high interest rates.
21. Microfinance appraisal
• Micro finance institutions have become corporate moneylenders,
using extortionary recovery practices, exorbitant interest rates.
They have even raised funds from hedge funds, capital markets and
having poor governance tried to rig the stock markets, have no
regulatory mechanism, proved to be exploitative. There is a need to
ban them, but unfortunately government decided to back them up.
Their interest rates are capped at 24%.
• SHG model is received better, they charge 18-24% interest, the loan
amounts are maintained small to keep the risk low, women among
these are taking up several livelihood activities like running mid-day
meals for school children, street cleaning, recycling etc.
• However, SHG loan amounts are too small to cross the poverty
reserve, microfinance loans are large but too costly. So were are
caught between insufficient model on one hand and expliotative on
the other.
22. Revamping the Credit Delivery
• The branch expansion has to be continued and should cover the lost
ground. There is a reduction of 2500 braches instead of an expansion of
10000 branches. This has occured under circumstance of no alternative
being provided, creating a vacuum. The RRBs should be strengthened.
Branch level break-even need to be removed as a criterion, over break-
even should be adhered.
• The rural branch expansion should be done with more qualified people
to work in the rural conditions, ie, agricultural science people, MBAs in
rural development etc.
• There is a need to straighten the priority sector definition, things like
microcredit, rural housing should be removed, so that greater credit is
directed at agriculture.
• There is a need to increase the coordination between the district
administration and credit management, monitoring and regulation by
NABARD.
• Loan waivers should be discouraged, should be confined to small
borrowers in rainfed areas. But there should be a Credit Guarentee
Scheme implemented through encouraging a cooperative institutions.
• NABARD’s refinancing capacity should be increased.
