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Banks: Penetration concerns!

Aug 18, 2006

An unprecedented demand for credit over the past 2 fiscals led to the country's credit to GDP ratio chart a steep climb. Infact in absolute terms the volume of credit nearly doubled between FY03 and FY06. The consistent 30% YoY growth in incremental disbursals persuaded banks to lighten their treasury portfolios and concentrate on the higher yielding advance book. The growth was not just in the retail segment (especially mortgage loans) but also in the corporate book (primarily SMEs). The corporates who initially borrowed only for working capital purposes, gradually sourced capital for capex also, as overseas borrowing became expensive. However, an analysis of the penetration levels of such credit brings to light the perils endangering the growth of banking sector.
Geographic distribution...
No perceptible change in the distribution of credit between the urban and rural areas of the country over the past decade point out to the fact that the consumption growth in rural India has been much lower than average real per capita consumption growth in the country. This points to the poor performance of oft-perceived average welfare in India's rural sector. The steep decline in GDP growth in FY03 also brought to the surface the vulnerability of the economy to agricultural sector growth despite its strengths on other macro-economic indicators. This has also surfaced from the unwillingness amongst banks to lend directly to the rural segments. Apart from lending less than the stipulated 18% (of total incremental credit disbursals), many banks are shying away from agriculture and priority sector lending by resorting to the soft option of investing in NABARD bonds.

The geographic concentration of bank credit is also evident from the fact that 5 states having the highest proportion of per capita credit enjoy 55% of the total credit disbursals in the country. Of this, again, Goa despite having a high per capita figure (due to lesser population), shares a minimal proportion of total credit.

FY06 Per capita
credit
Share of
total credit
(Rs) (%)
Delhi 34,554 12.1
Maharashtra 27,589 25.2
Goa 24,716 0.3
Tamil Nadu 17,708 10.0
Karnataka 15,371 7.5
Source: CMIE

Per capita distribution...
The fact that the lending rates moved to considerably lower range over the past couple of years (despite the recent hardening) led to higher incremental demand for credit (incremental credit deposit ratio was over 100% in FY06), which in turn impacted the penetration levels. To put things in perspective, while 70% of the total bank credit was lent at rates between 14% to 18% per annum in FY01, less than 10% of the bank assets are locked at such high rates today. However, the penetration statistics reveal a different story if you look at the per capita accessibility of credit. Despite the credit growth in FY05 and FY06 being robust for banks, the same merely helped the growth in per capita distribution of credit rather than credit per branch. Although the historical trend shows a direct association between the two variables, they have moved in tangential directions over the last two fiscals. This implicates that there has been credit concentration rather than penetration.

The impact of this...
Uneven distribution of credit between the economically privileged and underprivileged classes of the society not only undermines the growth prospects of the economy, but also poses threats to the long-term growth prospects of the banking sector per se. Not only will credit concentration choke its optimum utilisation possibilities but may also give rise to higher delinquency levels. That said, higher credit penetration could also prove to be the key to broad-based consumption expenditure and better standards of living.

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