Innovations in banking : the syndicate's experience

DOM STIC -INMiAC STUD S NO 46 t0 0 - - INNOVATIONS IY 3ABMTING: THE SYNDbCATE -S EXPERIENCE By V.V. Bhatt January 1978 PubL ic an. Private FInnance Dlris ion Demopmen t Econotics Darmet Development Policy Staff 0b DOMESTIC FIlJANCE sT D 26. Revenue Policy for Thailand: Income, Sales and Prooerty Tax. October 1976. 7. An Estimation af the Hyjousehod Sector Savings of Sri Lanka. August 1976. 3. Saito. 28. The Unorganized Financial Sector in Korea, 1945-75. November 1976. Yu . ChuW 'ark. 2. Contractua, Savings and the Mobilisation o4 Resources. "ovember 1976. P. Shame. 30. Tax Evasion and Avoidance: A Crucial But Neglected Aspect of Taxation. Dec. 1976. J.N. Sharma. 31. Asnect of Savings Behavior in Rural India. December 1976. Surjit Bhalla. # 32. The Incidence of the Corparation Income Tax: A Fixed Endowment, Soecific Factor Model. January 1977. P. Shome. 33. On Monetary Data and Analysis. February 1977. V.V. Bhatt. 34. A Program of Research on Financa and Development. March 1977. R.S. Eckaus. 35. The Determinants of Savings Behavior: A Survey of the Evidence. March 1977. K. Saito. 36. Sime Project Issues in Indexation of Financial Contracts. April 1977. 5. Yusuf & V.V. Bhatt. # 37. Meeting Basic Needs in Malaysia: A Sumary of Findings. April 1977. J. Meerman. 38. The impact of Contractual Savings on Resource Mobilisation and Allocation: ""ne Experience of Malavsia. April 1977, K. Sa4to & P. Shome. 39. The Comrercial Banking Industry in Brazil 1964-1974. May 1977. S. Yusuf. 40. Enter-orise Control in the Soviet Union and China: The Futilitv of Lessons. June 1977. 5. Yusuf. 41. Bank Behaviour and the Control of Credit Flows: Lessons from the Sri Lanka ExDerience. June 1977 JK.S. Ghandni. 42. The Distribution of Public Expenditure for Education and Agriculture in Maa'ysia - Methodological Issues and a New Aproach. October 1977. J. Meerman. 43. Division of Public and Private Finance: Research P-orram and Its RatiOnale. October 1977. V.V. Bhatt. 44. Understanding Self-Management i Yugoslavi4a. November 1977. S. Yusuf. 45. A Statistical Analysis of the Dynaknics of Econcmic Growt'h in Iran: 1959-73. D-ecember 1977. W.A. Dellalfar & J. Khalilzaden-S2irazi, -6. Tnnovations in Banking: The Syndicate's Exierience. January 1978. V.V. Bhatt. ACKNCULEIDGMENTS This is a re-vised version of the earlier draft of the study of the innovations izitroduced by Syn.dicate Bank in its baking activities. This study is undertaken under the guidance of Dr.V.V.13hatt of the World Bank, Washington. The author is indebted to him for the many valuable suggestians made by him at different stages of the de o3pment of this research project. The author also had the benefit of personally discussing the earlier draft of the report with a number of experts in the World Bank at Washington during August this year. As I Ihave encroached upon the time and courtesy of a good number of experts in different fields, individual acknowledgments would make a big list. However, particular mentian must be made of Nr.Charles Taylor, Economist in the Country Programmes Departient of World Bank and Dr.A.G.Chandavarkar, Adv,-iser, International Monetary Fund. The source materials used for this study are mostly the annual reports and the published financial statements of the Bank. The various research studies o' the Econcmic Research Department olC the Bank, both published and unpublished, are e-tensively quoted. Some data which are of a confidential natu.re are also cilled where necessary. The author acknowledges with thanks the support given by Mr.K.K.Pai, Chairman and Managing Director OL' Syn.dicate Bank. Thanks are. also due to the research staff of the Economic Research and Plarming Department of the Bank for their co-operatian. December 20, 1977 N K TIEEGAILAYA C 0 N T E N T S Pne-e s CEAPTER 1 Synd icate ank -nd Its innovations 1 CEJaLKES 2 : Mobilising- Small Savins 9 CFÉÆETE 3 : Lending to Agriculti-:e 31 CHA=TER 4 : Advances to Small Borrowers 53 CRDTE R 5 : Economics of Brench E2pansion 72 CRAPTER 6 : Operating Costs and Prof itability 100 ÅäIXTURE 1.1 : The Growth of Syndicate Banz - A Statistical Profile 120 XUP3 2.1 Share of Pi£my Deposits in Total Deposits 122 MüiXimJE 2.2 : Growth of Different Categories of Deposits 123 ÄREXURE 2.3 : Gro-th of Pigmy Deposits in Different Categories of Branches 124 EXU?3E 5.1 :Agricultural ådvances and Delin- quency Ratios 125 lIEXUP- 4.1 Syndicate BankIs Small Advances Covered under CGC 126 MEUPE 4.2 :Occupoational Classification of Small åorrowers 127 AXI=.E 5.1 : Prof itability of Branches 129 ~NEJET3 5.2 : Workine Iesults of a Rural Branch 130 irf-XL 6.1 : The Changes in the Deposit Rate Structure 131 1RiZUPE 6.2 The Interest Rate Structure of Advances 132 IEXUJ3 6.3 Syndicate Bank : Operatin- Costs and .atios 134 CEAPTER 1 SYNDICATE BANK AND ITS INNOVATIO.NS Syndicate Bank ranks eighth among the 14 nationalised banks in India. Founded in a small town in South Kanara district in Karnataka state, fifty-two years ago, it has now grown into a big bank having branches all over the country. The South Kanara district being the cradle of 22 banks, competition among the 1 banks is eminently explicit in their operations . In the nascent stages of banking development, the mushroom-like banking companies were shaking the confidence of the bank-minded people through their sudden spurt.and equally sudden crash. Gainin6 the support of a larger section of the society was Lndeea a a_t'icul, task and equally difficult was the problem of facing tre competition from tne city-based banks operating with larger resources. Uniformity in the banking procedures and rates charged on loans or interest rates offered on deposit was conspicuously absent in those days. It emerged slowly at a later stage, after the Reserve Bank of India was vested with regulatory powers in the early forties. Rate war among the banks was almost a common feature then. Patronages and affiliations to banking companies were influenced in no small measure by local patriotism and communal affinities. Syndicate Bank, operating in this atmosphere, retained the chara- cteristics of a local bank till the fifties. The banking industry in India however, has undergone many structural readjustments and its sphere of activities has been substantially enlarged during the last half a century. Through regulatory measures after the enactment of the Banking Companies 1 See "Regional Banking Growth - A Case Study of South Kanara" by the author (scheduled for publication in 1978) 2 Act of 1949, the weaklings among the banks have been weeded out, bringing down the number of banks in the country to 85 at present. Socia.1 controls were introduced in 1968 to accelerate of the*flow of bank credit into the priority sectors. The nationalisation of 14 major banks in 1969 has vested the government of India with greater powers to control and manage these banks. The public sector banks, including the State Bank of India group, account for more than 85 per cent of the banking business at present. These banks are increasingly entering into non-conventional banking activities which could have been categorically denounced as non-banking, a few years back. Their pattern of credit deployment and the composition 2 of the customers served have changed significantly . The growth of Syndicate Bank and the innovations introduced by it may have to be analysed against this background of the changing horizon of the Indian banking industry. Syndicate Bank has emerged as one of the big 10 nationa- lised banks, growing from a small town bank in 1925 into an all India bank. Its growth path resembles an exponential growth path, the accelerated growth starting during early sixties. During the fifties and sixties, the Bank has taken over 20 banks, big and small, in different parts of the country. This has broadened its area of operations and expanded the business opportunities. The total deposits mobilised by it through its various saving schemes are over Rs.7000 millions as on June 1977. 2 "New Trends in Banking" by Department of Banking, Ministry of Finance, Government of India, New Delhi 1974. The volume of credit disbursed is around Rs.5200 millions. It has a net work of more than 920 branches -covering all the major industrial and financial centres in the country, besides the large number of rural areas where it has been operating since its early stages of growth. It has opened its first overseas branch in London during August last year. The type of banking business handled by tl-e Bank range from agricultural lending to financing foreign trade and selling travellers' cheques and also doing merchant banking. The details pertaining to three selected indicators of the growth of the Bank during the last 15 years are presented in Table 1. There has been a notable growth in the market share of the Bank since 1960; from one per cent, it has gone upto around 4 per cent. The Bank today occupies a prominent position among the big banks when judged by the number of deposit accounts and borrowing accounts handled. The Bank has over 5.6 million deposit accounts and nearly one million borrowing accounts. An overwhelmingly large percentage of these accounts are in the smaller denominations. Nearly 88 per cent of 'ne deposit accounts are in the deposit group of less than Rs.1500. In tkie case of advances, about 64 per cent of the accounts are in the advance group of less than Es.1000. Syndicate Bank has grown at a rate faster than the rate of growth of a few city-based banks which are much older in age. Among the banks, both nationalized and non-nationalised, whose major area of operation was confined to the southern region till recently, Syndicate Bank is relatively the younger. cN 4 TABLE 1 GROWI'E CF STICAllTE BINK Syndicate Banking Share of Syndicate Bank Industry Bank (Percentage) DEPOSITS (Rs .Millions) 1960 189 20218 0.9 1965 591 32898 1.8 1970 1677 64793 2.6 1975 5366 134819 4.0 ADVANCES (Rs.Millions) 1960 122 12458 1.0 1965 '372 21955 1.7 1970 1228 46850 2.6 1975 3811 97692 3.9 RELUES (Number) 1960 139 4869 2.9 1965 204 6133 3.3 1970 461 11146 4.1 1975 778 20437 3.8 Source : Statistical Tao.Les Relating to Banks in India (Various issues) - Reserve Banw of India, Bombay. Its growth, when measured in terms of the volume of business handled or the spread of its operations both spatially and functionally, turns out to be appreciably higher than that of many of the other banks. During the post-nationalisation years, its growth has been above the average growth rate of the p-ublic sector banks. In the operations of the Bank, the rural bias was very pronounced in the earlier years;it isslowly diminishing with its spread into wider geographical areas. The 'area approacht adopted by the Bank has created certain pockets of intensive banking where the Bank has a good net work of branches. The rural branches constitute 39 per cent of its to I branches while the all banks' average is 37 per cent. The Bank mobilises 12 per cent of its deposits from the rural centres, the all banks' aveiage is only 8 per cent. In the deployment of credit, the share of the rural branches of the Bank is 11 per cent as against 6 per cent for all banks. The Bank has a slight edge over other banks in the overall pattern of credit disbursement specially to the priority sectors, as it has beenapioneer in agricultural financing and retail lending3. TE COTRIBUTING FACTORS The Bank's achievement and emergence,as a big bank could be largely attributed to its resilience to invent "new products" to gain new business or to strengthen its market share in the face of stiff competition. I. nad to put in greater efforts to seize a business opportunity or a new market not tapped by the larger banks on account of the high intermediation costs. Thus the Bank's strategy of selecting the "small savers" and "small enterprises".was purposive and deliberate. These classes of customers were not sought after by the conventional bankers. As it was imperative to keep the cost of intermediation at low level, the Bank had to produce new products like "Pigw Deposit,1" and had to introduce 'new processes' like the outdoor deposit 3 The Bank has one.of tne largest number of accounts of the priority sector lendings. See "Current Banking Statistics'" Ministry of Finance, Government of India, New Delhi, January 1977. 6 collection through commission agents and the provision of banking services through the rural representatives in the villages. In the initial stages of development, the opera- tional costs could be pegged down ^by recruiting staff locally at a lower scale of remuneration. They were motivated to develop a degree of esrit de corps not found norm1ly in tne conventional bankin- companies. Every innovation introduced by the Bank, however, a not a revenue-raiser. A few of them were given up after a trial while some others were modified and pursued. Some of the innovations were meant for supplementin- the efforts of the Bank in reaching a larger clientele. The "All iomen' s branches" run by Iaa.ies, te celebrations of "Lawyers' 7,eek", "Doctors' 7eek" and the like r.imed at attracting customers from different walks of life. To make its agricultural lend- ing activities more effective, the Bank promoted the Syndicate Agicultiure Foundation for the propagation the modern fa technolo&y and the dissemiLation of the knowledge of improved, practices. The Farm Clinic project is also an innovative step in the integrated rural development. The Self-Employment Clinics set up by the Bank sought to create employment oppor- tunities to the educated youth through bank finance and tech- nical guidance. The Investors' Agency service introduced in 1960 was meant for the small investors who wanted to invest in company shares and to whose investments a return of 9-10 per cent was assured,. It is however a very difficult task to =easure the impact of each of the innovations on the Bank's growth and efficiency. Their contribution could be tangible in some cases while non- tangible in many cases; their impact being on the improvement 4 This scheme had to be discontinued after the establish=ent of the Unit Trust of India whose functions are of similar nature. 7 of the image of the Bank. The employment of an industrial magi- cian to convey to the rural-folks the advantages of saving in the Bank, is an example of this type. Where they are quantifiable, their utility is assessed and analysed later. The financial imlicat ions of such innovations appear to be positive, the cost of the services being not heavily weighed down due to the innovative procedures. The overall financial results of the Bank compare favourably with those of other big banks. The unconventional banking practices adopted by the Bank had no official support or encouragement. Though the official attitude was not e3plicitly hostile, it was not sympathetic either in the pre-nationalisation years. There was neither any institutional arrangement available to share the risks involved in innovative banking like lending to small borrowers. The Bank ventured into these fields adapting the available financial technology to suit the environmental constraints under which it was to function. And this has paid variable dividends as a review of the history of the Bank would exemplify. The corporate strategy adopted by the Bank in its growth path could be reformulated as follows. When the organised banks in India were competing with each other to mop up the savings of the community, the Syndicate Bank chose to raise its resources, from the small savers at a relatively cheaper cost. For the deployment of its funds also, it selected the small borrowers as the risk would be spread over a large number of borrowers instead of only a few whose failure to repay might have disastrous imolications. The geographical areas for branch banking are so chosen as to develop a net work of branches for intensive banking in a given area. The cost of operation was controlled through The recruitment and 8 wage policj whici- prescribed the Vnim educational cuali- fications at hi±h school levels and offered relatively lover 5 remunerations . The inovations adopted in the se spheres have contributed to the grovth of the Eank dur'ing the last few decades, In tne czaoters that follow, four of these innovations - the Pigmy Deposit, agricultural lending, small advances and rtura! anking - are anskysed in detail, assess- ing their impact on the Bark's oerational results. Uth the rapid changes which have taken place in the banking envron- ment, the Eank n longer remains a patent-holder for these innovations. The experiences of the Bank, beig the early adopter of inovations, wculd be of considerable interest to the banking industry in the less developed countzies. Inferences from the Bank's experiences are drawr, avoiding to the, extent possible, broad genaralisatlions. 5 See er.O-.EMatt "Structure of Financial Institutions" Chapter; "Some Aspects of Recruitment and Promotion Policies in commercial banks" PP.59 EoMbay 1972. 9 CHAPTER 2 MOBILISIG SMALL SAVIDGS For historical reasons, the size of a.commercial bank in India is being judged in terms of the total deposits mobilised by it. When a large number of banks big and small are competing with each other in mobilising the sav- ings of the society, the volume of deposit mobilised is construed as an index of the confidence the public is hav- ing in a particular bank. Operationally, deposits have a more meaningful connotation to the banks. Their financial resources are almost exclusively dependent upon the deposits. The volume of their loanable funds and hence their scale of operations are governed by their deposit mobilisation efforts. Fixed deposits and savings bank deposits constitute about 82 per cent of the total bank deposits. These deposits originate mostly in the household sector as 58 per cent of the fixed deposits and 97 per celat of the savings bank depo- 1 sits are contributed by individuals and professionals The deposits of the corporate and government sectors are not very significant. The banks therefore woo the household sector by offering different types of savings schemes like recurring deposits and cumulative deposit besides the time 1 See Table on - "Ownership of Deposits with Scheduled Commercial Banks" in the Statistical Tables Relating to Banks in India, 1974, By the Reserve Bank of India, Bombay, 1976. deposits and term deposits. Except for minor variations in their operations, most of them have the same appeal to the savers. Broad uniformities in the rates of interest off~ered by different banks are ensured through mutual consent under the aegis of the Indian Banks' Association, to avoid undesir- able competition. However, ingenuity of the banks to introduce innovative savings schemes is not compbtely curbed. Scme cf the banks have been successful in breaking new grounds through their novel saving schemes. The Pigmy deposit is one scheme which distinguishes Syndicate Bank from all other banks, eventhough the imitations of this scheme are many at present. This scheme was conceived as a supplementary source of resource- mobilisat_ion specially from the small savers besides the other regular saving schemes. And it has remained so during the last five decades of its operation. The savings of the lower income groups are not generally tapped by any banking ccmpany2 because of the huge organisational task ard the modicum of business prospects. As the savings would be in dribblets, the cost or collection has to be kept down to render the saving scheme frnancially viable . It is terefore necessary to adopt a new strate6y to subserve these trin objectives. TEE PIGJ DEPOSE Under the Pigy deposit scheme, the Bank arransges to col:ect small sums of money on a daily basis from the door-steps of the prOspective customers. The minimum amount of savings collected from the depositors under this deposit scheme is Re.O.25 per day. 2 The non-banking financial intermediaries vhich are not subjected to any monetary contro;, attract the savings of these groups by offiring fabulous gift schemes. See, "Report of the Study Group on Non-Ban:ing Companies", Reserve Bank of India, Bombay 1975. 11 The accredited agent of the Bank would make his daily rounds to collect tne deposit from the customers. Be would also issue a receipt to the depositor indicating the balance as on tbat day. The period of maturity for the deposit is 7 years. At tte erd of the seventh year, the depositor, saving daily Re.0.25 is entitled to get Rs.700. The rate of interest offered is 3.13 per cent when the interest rate on savings deposit is 5.0 per cert. The attractiveness of the scheme is not the rate of interest, but the convenience of operations 3 The lower interest rate offered is justifaed on the grourd that for the dribblets of savings, there is no other avenues of investment available anc the opportunity cost is zero. The scheme contains a provision Ior converting the accumulated savings of over Es.1000 into Pigmy Fixed Deposits which fetch the ngher rate of interest applicable to fixed deposits. This concession is a bait to lock up the savings fuor a longer period. A stringent penal clause is also included in the rules of business of this scheme mking the premature withdrawals very unattractive to tae depositors. The Pi&my Collector, is not an employee of the Bank, he gets a commission on his total 4 collections . There has been virtually no change in the modus ozerandi of this scheme since its inception. 3 The savings bank deposits were not very popular with the bank customers in India until the early fifties. The rate of interest offered on savings deposits in the thirties was 2.5 per cent only. The Pigmy's interest rate was in fact slightly higher. 4 The staff members of the Bank were encouraged to undertake Pigmy collection work in the earlier years, with a view to boost up the total deposits. This practice had to be dis- continued in 1962 as the payment of Commission to staff members was prohibited. A short lived exeriment was mde in 1967 in appointing students as Piem Collectors. This ;as given up as the performance was very poor. 12 One aistinctive advantage of this scheme is that without going to the bank and doing the form-filling-ritual, a small man like a village trader or a petty merchant could save either Re.0.25 or multiples of that amount every day. This amount would be collected either daily or weekly by The Pies Collectors. The azount of savings being very small, the con- tributors would not eel the pinch of foregoing the immediate use of their little money. Loans are also arranged on the outstanding balance of the Pigmy Deposit at the time of need. To make the scheme more attractive, after a few other 5 banks started similar schemes , .the Bank has introduced a new variant called Adarsh Deposit Scheme in 1971. Under this scheme the duration is 5 years and the interest payable is 6'per cent as against 3.13 per cent in the case of Pigmy deposit scheme. Refunds are permitted after one year, without interest and if withdrawal is made after two years, an interest at the rate-of 3 per cent is given. As this revised scheme is more attractive than Piguy aeposit scheme, there has been a perceptible shift in the savers' preferences in its favour. GROWTh IN PIGIY DEPOITS At the time of the introduction of the Pig=y deposit scheme, on October 8, 1928, the total deposits held by the Bank were only Rs.28,807. During the next year, they increased to Rs.66,199. As the details. regarding the composition of the deposits are not availabie, it is not possible to assess the share of Pigmy deposits 5 Besides a few of the public sector banks, the urban co-opera- - tive banks also have introduced similar schemes. 13 in this increase in deposits. Details rela:ing to the compo- siuion of deposiTs zor The tirst 20 years, are not available in any published sources. The available figures relate to only total deposits; they are furnished in Annexure 1 .1. The annual balance sheets of the Bank do not furnish separately the figures pertaining to Pigmy deposits. Only from 1946 onwards, the relevant time-series data are available from the old records. The details of growth in these deposits are given in Annexure 2.1. The Pigmy deposits have increased from Rs*4 millions in 1946 to nearly Rs.477 millions at the end of 1976. In 1946 when the total deposits of the Bank were only Rs.28 millions, the'Pigmy Deposits accounted for 14 per cent of the total deposits. When the Bank's financial resources were very much limited, the share of this deposit scheme was not insignificant. At present these deposits constitute 7 per cent of the total deposits handled by the Bank. Though there has been a substantial increase in absolute terms, there appears to be a decline in the relative share of Pi6my deposits. This is due to the more rapid growth in other types of deposits as has been revealed by the overall trends in Indian banking industry. With the expansion of baning facilities and the spread of banking habits, interest-consciousness among the depositors has become explicito Their preferences are now in favour of fixed deposits and recurring or cumulative monthly deposit 6 schemes where the rates of interest are slightly higher 6 Besides these, the urban savers are constantly prodded by the industrial undertakings who offer interest rates frcm 12 to 15 on company deposits. 14 This phenomenon is as much applicable to the pattern of deposit 6rowth of Syndicate Bank, as it is to the entire banking industry in India. The available banking data pertaining to the last three decades corrobotate this phenomenon7. The share of fixed deposits has increased from 31 per cent in 1946 to 52 per cent in 1975. The savings bank deposits have gained considerable prominence in the composition of total bank deposits. The hike in the interest rate on savings bank deposits in 1953 has given a fillip to these deposits and they now con- stitute about 25 per cent of the total deposits. The huge increase in the savings bank deposits has dwarfed the relative share of Pi6my deposits in the total deposits of Syndicate Bank. In 1949 both of them were al- most at the same level : Pi6=y aeposits - Rs.6.60 millions and Savings bank deposits - Rs.6.06 millions. Their ais- parate growrt raues accentuated in the fif ties, boosted up the savings bank deposits to cross 2S.1855 millions in 1976 while Pigmy deposits remain at Rs.477 millions at the end of the same period. The share of savings bank deposits has increased to 25 per cent in 1976 compared to 18 per cent in 1949. The fixed and other deposits have increased from 7 The composition of deposits of Indian Banks: Year Savings Current Fixed Total 1946 1297 6078 3262 10637 (12.2) (57.1) (30.7) (100.0) 1975 36846 33019 76820 146685 (25.2) (22.6) (52.2) (100.0) Source: Statistical Tables Relating to Banks in India, 1952 - Page 3 and Statistical Tables Relating to Banks in India 1975. Reserve Bank of India, Bombay. 15 Rs.12 millions to Rs.3198 millions during the sam period. Their share is 51 per cent in the total deposits* The available data relating to the changing composition of the deposits of the Bank during the period 1946 to 1976 are given in annexure 2.2 The changing preferences of the savers moving in favour of the schemes other than Pigmy scheme could be attributed to the enhancements made from time to time in the rates of interest offered. The rate of interest on Pigmy deposits has been deli- berately kept constant at 3.13 per cent throughout with the objective of controlling the cost of raising funds through this scheme. In the case of the other deposits, the rates of interests are fixed by the monetary authorities and hence they have been varying along with the "bank rate". The rate of interest on savings bank deposits has increased from 2.5 per cent in the thirties to 4 per cent in the sixties and is 5 per 8 cent since 1974 . The average rate of interest on fixed depo. sits has increased from 5.5 per cent in the thirties to around 10 per cent at present. The Adarsh Deposit, the younger cousin of Pigmy deposit, has better chances of acceptance by the interest-conscious depositors as it offers a 6 per cent yield. But the cost of raising the funds would inevitably go up. The withdrawals of the deposits on maturity - sometimes even earlier than maturity - are fairly heavy in the case of Pigmy deposits compared to other deposits. Unlike in the sav- ings bank deposits, the withdrawals wipe out the whole amount 8 This has been again revised in June 1977 by the Reserve Bank of india; Savings Deposits - 5 per cent and savings bank deposits - 3 per cent, the latter account has the cheque facilities. 16 accumulated in a single operation. The outstanding balances under this deposit scheme therefore tend to grow very slowly. During 1976 for example, the total collection of Pimy and Adarsh depos.ts axe Rs.374 millions while the net increase in the balance butstanding is only Rs.80 millions, raising, the total Pigmy and Ad:-sh deposits from Rs.397 millions -to Rs.477 millions. Despite the relative shrinkage of its share, the Pig:r deposit scheme taps the savings of the community hich could not be otherwise sipconed into the organised banking channels. With an imDrovement in their interest sensitivity - which is assumed to be low in a less developed economy - there is bound to be shift in the demand for hi6her interest-bearing assets. Mnd this transition is likely to assign a declining role to the deposits lie the PiVm in the future pattern of total deposits. T:e advantage of operating this scheze how- ever is the relatively lower cost of raising the resources, as explained later. RU-UEN-COMPOSITION A review of the pattern of generation of the Pig=r depo- sits in the rural and urban branches would be useful in assess- ing'the effectiveness of this scheme in different areas. With the extension of the Bank's branches, the Pigmy depo- sits scheme was also extended to all the branches, urban, semi- urban and metropolitan. Y,hen this deposit scheme was fi=st formulated, the Bank had only 2 branches one rural and another semi-urban. Subsequently when the branch-composition changed with the opening of branches in the -:rban centres, the Pigmy scheme was introduced in these branches. The available data on the composition of Pimy deposits from 1946 to 1976 reveal marked changes. The data are presented in Annexure 2.3 17 In 1946, when the number of branches was 73, the total Pigmy deposit was Rs.4.02 millions. .-The four metropolitan branches were accounting f ar ,s.0.95 millions of deposits as against Rs.0.30 millions held by 26 rural branches. The share of the rural branches was around 7.5 per cent until the late fifties. The recent data relating to the rural- urban composition of Pigmy deposits are presented- in Table 1. GRO*iTE Ici FI1( DW.lY A.nMillions) Branch elassi- 1960 .1965 1970 1975 fication Rural 1.96 7.36 14.20 49.05 ( 5.03) ( 7.86) ( 9.20) (12.35) Semi-urban 14,52 32.10 50.16 121.15 (37.11) (34.30) (32.50) (30.49) Urban 12.96 30.98 45.68 110.42 (53.12) (33.10) (29.60) (27.79) Metropolitan 9.68 23.14 44.29 116.58 (24.74) (24.74) (28.70) (29.37) TOTAL 39.12 93.58 154.33 397.30 (100..00) (100.00) (100.00) (100.00) Note: The standard.ised population-wise classification of branches is as follows: Rural - Population upto 10,000 Semi-urban - Population 10,000 to 0.10 million Urban - - Population 0.10 million to 1 Million Metropolitan - Population above 1 million 18 The Pigmy deposits collected from the rural branches were hardly Rs.2 millions in 1960. They have grown to.nearly Rs.50 millions at the end of 1975. Consequently there has been an improvement in the share of the rural branches in the total Pigmy deposits. Their share has increased from 5 to 12 per cent. There has been a parallel development in the contribution of the metropolitan branches to the total pool of Pigmy deposits, though not relatively as profound. Their share has risen from 25 per cent in 1960 to 29 per cent in 1975. In the case of the semi- urban and urban branches, slight decline is noted during the same period. The branches in the metropolitan centres evidently offer greater scope for the mobilisation of Pigmy deposits than the rural branches. The wage-earners, doctors, hotel keepers ard 9 retail traders form the major market for Pi6my collections The average amount of savings per Pi&my deposit account in rural areas is Rs.385 as against Rs.753 in urban areas. About 22 per cent of the Pigmy deposit accounts originate from the rural areas. The scheme originally formulated to tap the savings of the semi-urban areas, now finds a better market in metropolitan areas and prt:.towns. This..adaptation has favourable financial impli- cations to the Bank. The cost differentials in raising Pigmy deposit from rural and urban branches - the cost being largely governed by the rate of commission-are negligible. THE SMALL DPOSITORS The strateEy adopted by the Bank for deposit mobilisation, as stated earlier, is oriented towards small savers. A review of this proposition may be briefly made to gauge the extent of 9 The Bank has 2769 Pigmy Collectors, of -hom 2348 are in metro- politan and urban centres. 19 the Bank's reliance on the small savers. The "small depositors" form over 90 per cent of the total deposit accounts of Syndicate Bank. The Bank has nearly 6 million deposit accounts. The small deposit accounts having an average balance of upto Rs*1500 are nearly 4.96 millions, accounting for 88 per cent of the total deposit accounts, handled by the Bank. 'These deposit accounts incl-ude besides PigWy deposits, savings bank deposits, cumulative and also fixed deposits. The relevant details are furnished in the following table. Table 2 DISTRIBITION- 0' 'DEPOSIT ACCOUNTS -- - - - - - - - - - - - - - - - - - - - - - 1965 1970 1975 Deposit Groups No.of Percent- No.of Percent- No.of Percent- A/cs. age to A/cs age to A/cs age to total total total Upto 1s.1500 759687 91.74 1677675 90.97 3985344 88.17 Rs.1500-Rs.2500 25654 3.10 58561 3.18 165644 3.66 Rs.2500-Rs.5000 24756 2*98 63108 3.42 218249 4.83 Above Rs.5000 18022 2.18 44790 2.43 150969 5.34 - - - - - - - - - m - m m- TOTAL 828119 100.00 1844134 100.CO 4520206 100.00 The number of small accounts entertained by the Bank has increased from less than 1 million accounts in 1965 to nearly 5 million accounts at present. There has been an impressive increase in the number of all deposit accounts of the Bank also. The increase is from a little less than 1 million 20 accounts to over 6 million accounts. The number of accounts having over Rs.5000 as outstanding balance, constitutes about 3 per cent of the total deposits of the Bank. The large number of small deposit accounts ostensibly mean a big clientele. But 10 servicing these accounts becxmes a labour intensive operation Judged historically from the environmental influences prevailing at the time of the genesis of Pigmy deposit scheme and the shrinkage of the deposit share of this scheme in the recent years, tr.e question arises as to whether Pigmy has outlived its utility. Some of the available evidences appear to indicate to the ccntrary. The escalation in the cost of operations is one of the factors which is likely to adversely affect the utility of this scheme. This is more so when the growing cometition and The increasing interest consciousness call for raisinlg the interest on this deposit to make it attractive. CO,T C ?IUan E.uun.CES An area in Inaian Banking in which practically no cuali- tative data are available is the costing.of various deposit schemes and the lending progrzmes. Syndicate Bank is no exception. In the absence of an elaborate cost-accou.nting system, a modest attempt bas been mad.e to estimate the cost of operations of the various saving schees of the Bank. This is more an expedient estimate, influenced by computational conveniences than a mticulous measurement of the costs. The results could be used as broad contours of costs than as the precise estimates. This exercise is based on a study of a 10 The number of deposit accounts hancled per employee works out to be 287 for Syndicate Bank as against 120 for all public sector banks. 21 representative branch and the data relates to the year 1975. Tne costs or raising funds through f our types of savings schemes incluiing the Pigy Deposit scheme are calculated. The relevant data are furnished in table 3. TABLE OlERAIi G COSTS O SY1DICATE BÅY'KS DEPOäI2 SCRES Cost of • Cost Structure (Percentaze) Type of Deposit operation Inte- Incen- Esta- per annum- rest tive/ blish- on outstand- Others Total ing balance) Comi- cont ssion cost Current Deposits 0.20 - - 60.00 40.00 100.00 Savings Bank 6.96 61.35 0.14 50-78 7.73 100.00 Fixed and Cumu-Lative Deposits 13.01 90.08 0.15 8.62 1.15 100.00 Pigmy and Adarsh Deposits 5.52 8.48 70.05 20.11 1.36 100.00 -2 ALL DEPOSITS 8.55. 80.32 1.76 15.69 2.23 100.00 In estimating the cost of operation of the deposit schemes all the costs incurred including the head office cost are taken into consideration. The cost of raising Rs.100 of Pigmy deposits is Rs.5.52 as against the cost of Rs.6.96 for raising Rs.100 under the savings bank deposits. After the recent upward revision of the deposit rates, fixed deposits have become a relatively coatlier deposit for the banks. The cost of raising Rs.100 of fixed deposits is now estimated at Rs.13 for Syndicate Bank. The cost of Pigmy deposit thus appear to be comparatively lesser than the cost of other deposit schemes in general. 22 A review of the structure of the cost of raising re- sources through various types of deposits reveals that the interest cost constitutes about 80 per cent of the total cost. The establishment cost works out to be about 16 per cent. The frequency of operations in the case of current deposits and savings bank deposits being,hdgher, the esta- blishment costs constitute a sizeable percentage of the total cost. Though no commissions are paid for canvassing savings bank and cumulative deposits, some monetary incen- tives are provided to the staff through annual competitions. In the case of Pigmy deposits, the interest component is of a lower magnitude while the commission paid to the Piy Collectors forms a, sizeable percentage of the total cost. It accounts for 70 per cent and the establishment cost is around 20 per cent. Another cost element, though of a lower magnitude, is the premium paid on the deposits to the Deposit Insurance Corporation, which has been set up in 1962 under an act of the Parliament. The insurance cover provided by the Corpora- tion has extended from Rs.1500 per depositor in the initial years to Rs.20,000 at present. The premium charged was 0.05 per cent per annum till recently and at present it is 0.04 per cent per annum. As Syndicate Bank has about 97 per cent of the deposit accounts in the deposit group of less than Rs,20,000, the amount of premium payaole would be relatively larger compared to other banks. The deposit insurance premium paid by the Bank is Rs.1.69 millions during 1975 and Rs.2.18 millions during 1976. A comparative analysis of the cost of raising resources by Syndicate Banr and other banks is rendered difficult by the 23 inadequacy of data available. This-lacuna in the banks' cost data has been partly remedied by the Study Group on 11 Banking Costs of the Banking Commission . The report of this Study Group provides the cost details of deposits for banks classifying the branches into three groups. The cost data are available for The group of branches and not as the average for the bans. Among the deposits, they have consi- dered only, current, savings, fixed and other deposits. However, tne details of the cost of "Other deposits" are not given in arr of the tables published by them. On account of this aata gap, it is not possible to make a comparative analysis of the cost of £igmy deposits with "other deposit scnemes" offered by other banks. Secondly, the details available in The Study Group's report pertain to the year ending Ma.Lch 1970 and the cost structure is based on the interest schedule in operation during that year. However, there has been an upward revi- sion of the interest rates during July 1974. The cost details worked by us for Syndicate Bank relate to the year ending December 1975. On account of this, the data available in the Report become non-comparable with the current cost stru- cture of the banks. COST ESCALATION Rise in the cost of operation of all banking services in the recent years is almost an universal phenomenon. 11 Report of the Study Group on Banking Costs, Banking Commi- ssion, Government of India, Bombay 1971, pp.58-65. 24 However, the non-availaoility of cost data relating to the earlier years discourages any attefmpt to assess the extent of the escalation in the cost of operation of Pigr deposits since its inception. It is also difficult to make a back- ward projection of the cost of operations. 7.hat little could be done here, confining to the past one decade, would be inevitably based on surrogates for some of the major cost items. The data relating to the major cost component i.e. PigW commission are available for 1965, 1970 and 1975. For the other three cost components, - the establishment cost,-interest cost and stationery and printing cost - the Bank's total costs (for all type of activities) are consi- dered as substitutes. These data are presented in whe follow- ing table. TABLE A COST & OPiEATION CF PIGMIY DEPObITS (Rs.Millions) Commission Total cost of all Oerations Year paid on Pigmy Establish- Interest Printing and deposits ment cost cost Stationery cost 1965 0.67 19.80 17.10 1.24 1970 1.08 61.70 64.07 2.98 1975 9.85 210.30 309,90 7.85 The upward revisions made in the salary structure and the higher interest rates stipulated by the monetary authorities with a view to encourage domestic savings have jointly contri- buted largely to the rise in the cost of bank funds. The a m a 25 salary structure of the banking industry is periodically revised upwards on the basis of the agreements reached with the staff unions. The establishment cost nas been therefore increasing as the major component of the cost of raising funds. The printing and stationery expenses also have been on the increase,largely attributable to tne rise in prices. For facilitating the comparison of the total cost over the period, a composite cost index could be derived with 1965, the first year as tLe base. The percentage snre of each of tne cost component in the total cost as given in table 3, are used as the weights to compute the composite index. The number of deposit accounts is used as a deflator. Similarly, the cost indices of all deposit scheme are com- puted for tne same period. The number of accounts is used as the deflator because of the fact that irrespective of the amount involved, the number of accounts would directly influence the total cost. The commission paid is a direct function of the total.deposits and the relevant data are separately available. Larger the number of accounts, greater would necessarily, be the cost- of stationery and labour charges. The weihted arithmatic means of the composite cost indices of Pi6my deposit scheme and all deposit schemes axe presented in table 5. 26 TABLE5 COST INDICES OF PIGMY DEPCSITS A1D ALL DEPOSITS Pigmy Deposit All Deposits Pigmy Deposit All Denosits rDeflated by No.of Accounts) ( Deflated by Amount 7 1965 100 100 100 100 1970 153 161 207 126 .1975 259 301 352 181 The cost index of Pigav deposit (deflated by the numoer of accounts) appear to have risen more than two and half times during the last decade. The cost index of all deposits has increased by a slightly higher magnitude. When the total value of deposits is used as the deflator, the cost indices show entirely different trend. The cost index of Pigmy deposit would appear to be increasing faster than the cost index of all deposit schemes. The deposit-deflatcr changes the cost indices substantially because of the fact that during the period 1965 to 1975, the Pigmy deposits have increased by four times while there is a nine-fold increase in the volume of total deposits during the same period. The disparate increase in the cost of Pigmy deposits vis-a- vis all deposits is corroborated when an attempt is made to , estimate the cost components for the previous years using a 12,tis mathematical model The results obtained by adopting this model and using the available data are as follows: 12 This was suggested by Mr.Ch-arles Taylor, benomist, Country Programmes Department of the World Bank. 27 1965 1975 Pigmy Cost Index 100 222 All Deposits Cost Index 100 171 During the last decade, the cost of mobilisatin of Pigm deposit has been on the increase. Though it coatinues to be a slightly cheaper mcde of raising deposits, the cost escalation has been of a larger magnitude. This could be attributed to the increase in the commission paid and the substantial increase in the rate of interest offered since 1971. Among the cost elements, as the commission paid to the Pigaq collectors constitutes the single largest ccmponent, for a number of years, the rate of comission paid on this deposit has been kept constant. From 1928 to 1962, the co-mmi- ssiaa was 1.5 per cent of the deposits collected. As the staff members were precluded from doing the Pigmy collectian work, the commission paid to the full time commission agents was raised to 2 per cent in 1963 and again to 2.5 in 1971. The rate of interest paid to the Pigm7 depositors was maintained at 3.13 per cent since the inception of the scheme. Only when the competition from other banks through imitations was found to be growing, the Bank raised the rate of interest on the new variant of Pigmy deposit-Adarsh deposit to 6 per cent in 1971. The interest actually paid to the depositor, in the case of premature withdrawl, depends upon the period for which the deposit is kept. However, the full amount of commission is paid to the Pigmy collector on the basis of the total amoL=t collected by him, irrespective of the period for which that money would be kept in the Bank. 28 The cost of the Pigmy deposit, therefore, would be escalated, in effect, if a good portion of the same is withdrawan before maturity,.depriving the Bank the advantage of utilising the same for lending. Usually, the branch managers dissuade the Pigmy depositors from withdrawing their deposit before maturity. They are encouraged to borrow against the security of their 13 deposits, instead of withdrawals 501h INFERENCES One of the attributes of-financial innovations by banks classified by Rondo Cameron, though in a slightly aifferent 14 context, is to attract resources . The Pigmy deposit scheme qualifies in this test as it has enabled its innovator-bank to raise resources specially in the earlier years of the Bank's growth. Along with the other commonly adopted schemes of deposit mobilisation, this scheme has been employed to tap the savings of a particular group of customers. Its efficacy as a resource-raiser could be judged by the relative cost of 13 As the premature withdrawal of deposits results in the forfeiture of interest, the Bank gets an amount of "unearned interest income". This, however, compensates partly for the expenses incurred for the payment of commission. 14 See Rondo Cameron, "Banking in the Early Stages of In- dustrialisation" Oxford University Press, New York, 1967, pp.314. 29 raising resources compared to other.-schemes. This scheme could be of interest to the less developed countries where the banking sector ana the financial institutions are yet to gain a strong base. The Pigmy deposit scheme could be adopted as a means or inculcating banking habits among those classes of the society wnich aoxmally remain beyond the ambit of modern banking. The itinerant bank agent would be perhaps more easily acceptable to them than to perform the form-filling rituals at the branch counters. This scheme has better chances of acceptance in the cities and small towns. Secondly, the cost of raising resources through this scheme would be somewhat lower if the commission and the rate of interest paid are kept constant at a particular level. The payment of comparatively lower rate of interest under this scheme does not tentamount to discrimation among the savers, because the dimunitive size of the daily savings would not fetch any interest until they accumulate over a period. And the very fact tnat.this scheme is more popular with the pressumably interest-rate conscious small savers in the metropolitan and urban centres than with the interest- insensitive rural depositors, suggests that the interest rate difference does not reduce the acceptance of this scheme. This observation is further strengthened by the practice of the medium size traders and hoteliers contributing fairly larger sums like Rs.100 per day. The scope for deposit mobi- lisation however is not unlimited, as it were. The competi- tion from the "finance corporations" in the unorganised sector which do not conform to any monetary discipline is a factor to 3o be reckoned with. The fabulous prizes offered by them lure away the gullible savers. The rate of bommission paid to the collectors is the crucial factor in determining the cost of funds. The commi- ssion should provide adequate incentive to the collector to maximise his efforts. The appointment of part-time agents could be experimented with, if the command area of the branch does not generate enough savings. To ensure that the re- sources raised through this scheme do not become relatively costlier, it is imperative to control the commission and the interest rate. This would also depend upon the interest structure of other deposits. The Pigqr savings scheme deems to have better mass appeal, given the necessary publicity support, during the early stages of banking development. If the premature withdrawals and the faster growta of higher interest yield- ing deposits are construed as the symptoms of the shrinkage in the popularity of Pigmy, they also represent the changing market conditions. The i=oroved version of Pigmy introduced lFter, in response to the market stimuli, has evidently better prospects. Designed as it is to attract the small savings, this scheme cannot be expected to net in larger resources. It enables the financial institution specially to reach a larger clientele. 31 CEAPTER 3 LENDING TO AGRICULTURE One of tne paradoxes of banking development in India has been the paradox of isolation - the commercial banks remaining isolated from the agricultural economy and con- tributing hardly anything to finance the agricultural deve- lopment. The locational constraints arising out of the urban-orientation of the commercial banks and their commit- ments to large scale industrial houses have almost made them to remain away from the farming sector. Till tiae "social controls" were introduced in 1968 by the monetary authori- ties, very little amount has been lent by the commercial banks to the agricult=ral sector - less than 2 per cent of A.1 the total bank credit Syndicate Bank has been one of the first commercial banks to lend to the agricultural sector as early as in 1964. The existence of the rural net work of branches facilitated the Bank's experimentation in agricultural financing. It tried to adopt the financial technology to the agricultural sector on a selective basis aiming to achieve an "assured yield" if not an "increased yield". The pumpset financing was the starting point which 1 See "Organisational Framework for the Implementation of Social Objectives" - Report of a Study Group of the National Credit Council, Reserve Bank of India, Bombay 1969, p.37. 32 fulfilled both the security and oroductivity criteria guiding the conventional lending procedures. The hypo- thecation of the pumpset provided tie security and also end-utilisation of the loan. Extension of credit faci- lities to other types of agricultural investments were introduced later. By the time the banks were nationalised, Syndicate Bank emerged as a "pioneer" in agricultural financing, not so much fox its volume of lending as for the beginning made in this direction. Today there is a surfeit of financial agencies in the field of rural credit - the co-operatives, commercial banks, the regional rural banks and the farmers' service societies. Besides the apex agricultural bank like the Agricultural Finance Corporation, there is the Credit Guarantee Corpora- tion of India which guarantees agricultural advances. Very recently there have been state enactments abolishing the village money lending. Against this historical process of evolution of agricultural credit agencies in India, the growth of Syndicate Bank's agricultural credit operations may be reviewed. A SPECIALISID DEPLTNhfT Syndicate Bank set up its Agricultural Finance Depart- ment in 1964 with the specific objective of evolving agri- cultural financing schemes. As an intimate knowledge of the operational picture of tne farm economy is an essential pre-requisite for any policy decisions pertaining to the agricultural sector, a number of field surveys, case stucies an6L farm experiments were undertaken to analyse some of the 33 economic aspects of peasant farming and also to assess the nature of the attendant problems; financial, institutional 2 and psychological The Bank' s lending programmes were based on the follow- ing 4 tenets. 1. The assessment of the credit requi-rements has to be based on the genuine needs of the faxmer ratner than on his present repaying capacity. 2. The adoption of a simple procedure of loan applications. 3. The immediate processing and ouick disDosal of the loan proposals. 4. The provision of extension service and technical guicance by the farm experts of the Bank are of crucial import- ance both in enabling the farmer to make the best use of his resources and in ensuring the proper utilisation of the credits. To organise the lending operations, the Bank recruited a new set of personnel who could provide the extension service with which the other Bank staff are not familiar. The services of an agricultural scientist were utilised to set up the depart- ment with a complement of field staff called 'Tam Representatives". The Farm Representatives are a special cadre of young officers recruited from the various Agriculural Universities in the country. They are given training and reorientation after the recruitment. Their training programme also included working in the rural branches, visiting and discussing with the progre- ssive farmers who axe using the modern methods of cultivation. 2 Some of the earlier studies are publisted in "Studies in Kanara Agriculture" published by Economic Research Depart- ment, Syndicate Bank Ltd., Manipal 1968. 34 They are also trained in the routine banking procedures. Their role is one of recommending to the branch manager on the economic viability of the loan proposal,'after making a field visit and satisfying for themselves about the technical feasibility of the investment project. A pre-sanction study of the farm projecti whether it is a small loan for raising crops or a medium size loan for setting up of a poultry farm, is made by the Farm Repre- sentative. Loans are sanctioned only after the field study has been undertaken by the FarmRepresentatives3. LOAN MANAGEIMiT The Bank extends agricultural credit to individual farmers for raising crops and also medium term loans for the modernisation of the agricultural operations. Crop loans are given for raising food-crops as well as commer- cial crops. The size of holdings or the tenurial Uattern have been seldom considered as hindrances to financing the small farmer. Loans are also given even to the marginal farmer, if the proposal is technically feasible ahd econo. mically viable. The cultivation of hybrid crops is a case where the size of operational holding is not the limiting factor. The standing crop. is hypothecated to the Bank for advances upto Rs.5000 and above that limit, other collateral securities are taken. The surety offered by a neighbouring farmer or any other person known to the Bank 3 There are over 200 Farm Representatives employed by Bank, attached to 620 branches. The command areasof Farm Representatives vary from 5 to 10 branches depending upon local conditions. 355 is also acceptable. The scale o f inance is fixed an the basis of the cost of cultivation of vazious crops . The amount of finance granted for 7aribus croms vary from region to region, dependirg ipon the variations in the per acre cost of cultivation. The amount is repayable in one instalment after the harvest. The rates of interest charged vary, between 11-15 per cent, depending upon the crop grown. Advances for the installation of pumsets is one of the most important types of agicultural advances. This is a term loan extenaing over a period of 5 to 5 yearz. The azount lent would' be 75 per cent of the total invoice value of tae pumcset. Fumpset and other accessories are hypothecated to the Bank. Similarly, advances are also made for the purchase of ;ower- tillers and tractors and also or sinking 0f irrigation weIls. Poultry and dairy loans are given either to the farmers or to tnose persons who 'have experience in undertaking suéh projectz. Besides the hypothecation of the farm implements, the surety given by a co-obligant is sufficient for the Bark to make the loan. . Group guarantees aze not usually considered by the Bank as they irrolve a number of problems of management4. Loans aze given mostly for productive purposes. The surplus generat- .5 ing capacity of the i4restment project is af primary consideration 4 Tne experience of the Bank in this sphere has been unsatis- factory leading to litigations. 5 -esides these advances against the pledge of gold ornaments is a com=on mode af lending in rural areas. Te rank has about Js.150 millions of gold advances. In the study cona.ucted by the Economic Research Department of the Bank, In a sample of 1000 borowers of gold loans, 616 borrowers are reported to be agricultui,sts. SEe "Gold Advances : An Zconomic Analysis" in Pigmy Economic Revie w, lani;al, kay ana June 1974. 36 AGRI.CARD SCHERE One of the innovations in farm credit introduced by the Bank which failed due to misuse was the "Agri card". This scheme was patterned after the credit card facilities offered by .some of tne American banks and was intended to provide instant creait to the farmers for the purcnase of farm inputs5. This scieme was introduced in 1968, confining to the Bankts branches in South Kanara district. The "Agri card" holder was given a credit limit of Rs.500 and he could obtain his requirements of fertilisers, seeds, manures and insecticides from approved agents and dealers. Laudable, though the scheme was, it had a very narrow span of life. The "Agri card" was like an overdraft for Rs.500, in which anynumber of transactions could be made within the overall limit. The modus of operation of this scheme was to make debits to the A-ri card current account of the borrower as and wnen duly authorised invoices were presented to the branch where the card was issued. The rate of interest charged was 7.5 per cent. Cash withdrawals were not permitted from this account since the very object of this scheme was to facilitate the purchase of the farm inputs. The over-enthusiasm to popularise this scheme all too suddenly spoiled its chances of successful operation. As soon as it was introduced, targezs were fixed for eacn branch for issuing the Agri cards. During the year, 1700 cards were 5 This was an imitation of the Bank of America's Credit card. 37 issued in all the 46 branches.' The selection of the far- mers and tne dealers was made in haste to reach the targetted number of cards. The target-oriented approach to any lending*programme, as the experiences of many financial institutions revealed, would be disastrous in its achievements. The'dealers in collusion with the card- holders misused the instant credit facility. Bogus invoices were used by the card-holders in many cases, while the dealers unofficially obtained the cards which provided them a source of cheaper credit. The scrutiny and follow- -up work for rectification became a problem and too much of botheration when compared to the volume of credit involved. The scheme was therefore not extended to other branches nor the amount per card raised as was originally intended. The Bank had to take steps to close the accounts and finally the scheme was wound up during the next year. The failure of this scheme stressed the need for extending the crop loans to the farmers on a more realistic basis. SPURT IN ODVAMCES There has been a steady increase in agricultural credit disbursement of the Bank during the last decade . Ls a result of the expansion in the branch net work, the Bank enlarged. its agricultural credit operations, covering new axeas, having diverse soil-climate complexes. The field staff deployed at the branches also grew in number. The number of borrowing accounts under various sche:ms of agricultural financing has increased from 13,640 in 1964 to 317,372 at the end of December 1976. The amount of advances outstanding 38 has inereased from Rs.29.5 millions to ',s.676.1 millions during this period.. The agricultural advances account for 13-5 per cent of the total advances of the Bank at present. The relevant details are given in Table 1. GROYWH IN AGRICULTU-IAL F Borrowing Amount out-• Shares of 4icultural Year Accounts standing Credit in the total ereQit (Number) (Rs.Millions) Syniicate Banking Bank Sector 1964 13,640 29.5 8.8 n.a- 1965 17,240 36.9 9.9 0.2 1966 23,360 45.6 9.5 0.2 1967 29,645 59.9 12.9 0-4 1968 35,896 86.4 12.2 0.3 1969 56,498 125.5 12.0 5.5 1970 98,6 7 173.2 14.1 8.4 1971 127,029 197.6 13.2 8.3 1972 144,333 262.9 14.7 8.4 1973 175,444 337.3 14.6 8.4 1974 192,289 395.3 14.0 8.7 1975 228,265 502-4 12.8 10.0 1976 317,372 676,1 13.5 11.1 The shift in the emphasis in the state polioc, in favour of agriculture and otter priority sectors nas been responsiole for the thrust made by the banking institutions in iinancing agriculture since- the late sixties. The agriculturai. a.vances 3,9 have grown from less than one per cent on the eve of bank nationalisation to 10 per cent of the total advances at the end of 1975. As a result, the edge Synaicate Bank had over other banks in the.snare of agricultural credit has been somewhat blunted. Secondly, though there nas not been any slackening in the agricultural credit operations of Synaicate Bank, a slight decline in the snare of agricuitural credit is discernible. This is largely due to the sizeable increase in the total deployment of funds by the Bank during the last few years. P_ATITERiGF CEDIT DISBURSAL The short term crop loans account for -alf'of the total agricultural credit disbursed by the Bank during 1975. They have grown from Rs.15.05 millions in 1965 to Fs.110.53 millions during 1975 while the term loans have increased from Rs.9.25 millions to is.114.48 millions during the same period. The credit extended to the marginal farmers has increased from Rs.4.12 millions during 1965 to Rs.-2.48 millions during 1975, the marginal farmers being defined as those cultivating an operational holding of less than 2.5 acres. The details relating to the pattern of credit disbursement are furnished in Table 2. The Bank has over 42,000 borrowing accounts of the margi- nal farmers. They account for over 55 per cent of the total borrowing accounts under crop loans. The small farners naving about 25 per cent of the total number of abcounts, have received Rs.26.07 millions during 1975. Other farmers comprising of medium Iarmers and big larmers have received crop loans of 40 TALBLE 2 TJ DI:>3URSENXEi\I CF AGRICULTURAL ADVANCES 1965 1970 1975 Type off creditN 16597 . No.of Amount No .of Amount(Rs, No.of Amount(,s A/os .(Rs.Millions)A/cs Millions) A/s Millions) I. Short-Term Croo Loans 6240 15.05 36980 42.52 81745 110.53 1. Marginal Farmers 3020 4.12 20120 10.23 42290 32.48 2. Small Farmers 2140 4.02 8040 11.52 21434 26.07 3. Other Farmers• 1080 6.91 8820 20.77 18021 51.98 II. Term Loans 4590 9.25 27312 30.86 56932 114.48 1. Sinking Wells 10 0.07 204 1.22 860 2.41 2. Pumpsets 121 0.27 1520 2.90 2051 7.26 3. Minor Irrigation 8 0.08 10 0.03 28 0.23 4. Tract.ors and Implements 30 0.67 408 5.07 910 26.77 5. Draught Animals 120 0.03 140 0.'15 920 1.27 6. Land Development 6 0.02 210 1.04 553 1.82 7. Construction of Godowns - - 8 0.06 33 0.12 8. Plantations 70 1.31 120 1.85 472 20.43 9. Dairying 120 0,15 4200 3.92 9936 15.74 10. Poultry, Piggery . 15 0.03 210 0.85 365 1.90 11. Fisheries 20 0.27 120 0.70 569 11.46 12. Others 4070 5.85 20162 13.09 40235 25.07 £DIA.L c=-IT DISK2SFD 10830 24.30 64292 73.38 138677 255-01 Note- 1. Farmrs in the size group of upto 2.5 acres are treated as "marginal farmers". 2. Farmers in the size group of 2.5 to 5.0 aeres are considered as "small far.mers') 3. All other farmers are included in "other Farmers". 41 nearlyh.W2 millions. The share of medium farmers (Operational size group - 5 acres to 10 acres) is 11,588 borrowing accounts and Rs.28.07 millions of crop credit. Out of the term loans, roughly 10 per cent of the credit is lent for augmenting the irrigational facilities on the farms. The credit given for mechanisation of farming operations is over 25 per cent of the total term loans. Plantations and dairy- ing are the other allied activities which have received assist- ance from the Bank. The fishing irdustry which is now being organised on scientific lines turough mechanisation, has also received financial assistance from the Bank. The average amount outstanaing per borrowing account for agricultural pur- poses, has slightly increased from REs.2140 in 1965 to Rs.2200 in 1975. DELIYQUENCY RTIO . Irregularities in the recovery of agricultural advances have been the bane of co-operative credit societies in India. It is partly this apprehension on the part of the bankers that the irregularities in agricultural finance would be too much of a botheration that prevented them from going into agricul- tural financing on a large scale. The approach adopted by Syndicate Bank was "cautious lending" so as to avoid the danger of the irregularities dampening the initiative in the formative stages. Defaulters and delinauents however cannot be eliminated due to a number of reasons. With the rapid increase in the total advances, it appears that there has also been an increase 42 in the ratio of overdues. The ratio of averdues is calculated by considering the non-repayment of the Instalment as a per- centage of the total instalments due at the end of the year. This however does-not mean that the loan is not recoverable. This could only mean a temporary failure of the borrower to adhere to the repayment schedule consecutively for two or three repayment periods. The overdue position is usually viewed with 7 concern as it is the'symptom of the advances becoming sticky . The total credit outstanding against the various a6ricul- tural,purposes has increased from Rs.36.90 millions in 1965 to Rs.269*43 millions at the end'of December 1975. The overaue amount has increased from Rs.0.20 million to Rs.4.57 millions. The overdue ratio has increased from around 17 per cent uo 52 per cent. The details of the agricultural advances and the delinquency ratios are given in Annexure 3.1. It may be noted here that this ratio is not alarming specially when*we compare it with the overall picture of the Indian Banking industry. According to the studies made by the Reserve Bank 8 of India the recovery percentage for all the Indian sche- duled banks is 52 as at the end of June 1976. Syndicate Bank's recovery performance compares favourably with the recovery percentage of other public sector banks. 7 To ensure prompt repayment, the Bank offers a rebate of per cent in the rate of interest. 8 Reserve Bank of Inaia Bulletin, Bombay, January 1977. 43 (At tne end of June 1976) Recovery Banks Percentage - - m - - - - - - - - - m - m m-- 1. State Bank of India Group 56 2. Nationalised Banks 49 3. Scheduled Banks 52 4. Syndicate Bank 76 Source R I Bulletin, January 1977 and Agricultural Finance Division, Syndicate Bank, Manipal. The recovery ratio of .76 per cent does not suggest that 24 per cent of the loans are bad debts. It only indicates that in the case of 24 per cent of the advances, the repay- ments are not regular according to schedule. Recovery pro- cedures including the legal proceedings, if necessary, have to be employed to recover the outstanding amount in these cases. The actual amount treated as irrecoverable is very small as could be seen from the amount claimed by the Bank 9 from the Credit Guarantee Corporation of Ldia . Syndicate Bank has not claimed any amount from the Cor- poration till the end of 1975. During 1976, the Bank has submitted claims for the loss incurred in respect of 63 accounts. The relevant details are given below: 9 Established 'oy an act of the Parliament in 1971, the Corpora- tion guarantees the advances made to the priority sectors. 44 Total Agricultural Advances of Synaicate Bank: As on Dec.1976 1. Borrowing Accounts (Number) 292,223 2. Amount Outstanaing (Rs.Millions) 523.43 C.G.C. Claims submitted: 1. Defaulting Accounts (Number) 63 2. Amount Outstanding (Rs.Millions) 1.27 3. Amount Claimed (.s.Millions) 0.52 If the number of claims filed by the Bank is consi- dered as an indicator of the irregularities of agricul- tural lending, the performance of the Bank in agricultural credit operations would pass as remarkably good. It may be added however that this could be only a partial indicator. The number of claims submitted to the Guarantee Corporation by all banks is not very arg at present. The claims are filed only after the lending bank exhausts all means of recovering the amount from the borrowers. Therefore, there is a time lag between credit disbursement and the submission of the claims to the Corporation. One of the factors contributing to the lower delin- quency ratio is the enlightenment of a large number of agri- culturists sought to be achieved tnrough the activities of Syndicate Agricultural Foundation - a voluntary association of farmers promoted by the Bank. The Foundation has been successful in providing extension services to the farmers10 10 Among some of the useful activities of the Foundation are the establishment of Future Farmers' Club and Farm Information Exchange Clubs in different parts of tte country. 45 The encouragement of the habit of thrift among the borrowers is a bulwark against the risk of delinquency. The moneylender has thrived in the Indian rural scene by scru- pulously avoiding the propagation of saving habits among the rural borrowers. The co-operative credit movement has also failed to emphasise the saving habits. Some corrective steps are now being taken up by them. Syndicate Bank appears to have been alive to this situation, though the results obtained are not tangible. As a matter of policy, the agricultural .borrowers are induced to open savings bank accounts in the branches. The Bank has also introduced in 1971 a saving scheme for the farmers called the 'armers' Protection Deoo- sit" scheme. In times of dire necessity arising out of crop failre,,.the farmer is eligible for a loan equal to double the amount of deposits outstanding in his account. The deposit could be kept in the savings bank account at the standard rate of interest (now 5 per cent) and he could avail of a short term credit repayable in three years at a conce- ssional rate of interest of 9 per cent. This is no doubt a well-conceived scheme, but has failed to make any headway. The inadequacy of publicity given to this scheme and the lack of enthusiasm shown by the managers explain the poor performance of this scheme. The managers appear to be preferring an early settlement of the loan account and renew if necessary as a fresh loan, than allow the credit balances to emerge in the savings deposits. The Bank is now taking steps to rectify these drawbacks. From this year the name of this scneme has been cnanged to "rishi Deposit Schieme". In a recent communi- cation to the branches, the Bank has indicated its desire to reach a target of Rs.10 millions of Iishi deposits auring 1977. 46 F APJá CL liiIC Pi.0JCT One of the very important innoyations intrcduced by Syndicate Bank in farm planning is tne establisbhemat of a "Farm ClinIc" at Eosala, a small vi1lage in South Kanara in 1973. A thoroug6h agro-econc=ic survey of the entire village has bceen cceducted where the sall farmers and marginal farmers predominate . Of the 296 farm households in the village, 215 are in the size froup of less than 2.5 acres - the marginal farers according to the commonly acceuted definition. On the basis of the ago-economic survey conducted 'oy the Bank, detailed farm plans have Iceen prepared for each of the farm households in the village. As the average size of holding is not more than 0.94 acres or a majority of these farm hauseholds, the Farm Clinic has suggested a crop rotation which is in tune -,ith their resource endowment, fertility ar oter physical features of the land. The crop miz is designed to inrolve less ex- penditure and to safe guar. against the urf oreseen f-ailure of specific crop duin the season. Paddy, s'veet potato and millet is recommended as the best combination as this ix has Ibeen found to yield the hiihest Gross income. Vegetable cultivation is the alternative crop sugested. Along with the necessary technical assistance oriered by the Farm Clinic the credit requirements are met tn.rough the nearest branch of the Iank. The package of inuts offered through the Farm Clinic has helped the iarginal farmers as well as the small farmers to make a break-through in their farm operations. 11 "Farm Clinic Project - Developme nt Plan for Getting Small and Marginal Farmers Lovinrg". Agricultural Finance Divi- sion, Syndicate 3ank, Manipal 1976. 47 The beneficiaries of this prdject are mostly the margi- 12 nal farmers and agricultural labourers . According to the available information, a total numoer of 425 marginal farmers in the village hare been given credit facilities by the Farm Clinic, amounting to Rs.0-53 million at the end of December 1976. Crop production loans have been given to 282 persons, the total amount lent being Rs.0.16 million. Loans for the development of dairy have been given to 203 farmers with a total amount of Rs.0.16 million. For tne maintenance of coconut gardens and for land development also financial assistance has been given by the clinic. The Syndicate Agriculture Foundation is closely associated with the opera- tions of the Farm Clinic. Besides credit, the necessary farm inputs are also being supplied through the Farm Clinic. Chemical fertiJisers ar insecticiaes are supplied at a relatively cheaper rate to enable the marginal farmers to imalement the farm plan as recommended by the technical experts of the Farm Clinic. Generalisation on the basis of the experience of one village is not prudent. However, the results obtained are encouraging. COST G2 OPERATIIOS An accurate assessment of the cost of operation of the agricultural lending schemes is an arduous task. Costing of various schemes specially in the case of a "multi-product" institution like a bank involves a number of computational 12 Sri N.K.Thingalaya : "Marginal Farmers and Agricultural Labourers in South Kanara - An Economic Analysis" published by Syndicate Bank, 1anipal 1976 pp.80. 48 difficulties. Apportioning the. cost of operations pertain- ing to the agricultural lending considered in isolation has some other difficulties. The total establishment cost of the Agricultural Finance Depaxtmnt and the cost of raising the resouces would be the two major components of the cost of operations of ag=icultural sdhemes. ,Kowever, the total cost of the Agricultural Finance Department is indivisible for -the simnle reason that the field staff are also engaged in deposit mobilisation campaigns as every staff member of the Bank at the branch level is expected to undertake such type of work. The total cost of operation of the schemes there- fore can be roughly estimated. As rightly pointed out by the.Study Group on Banking 13 Costs , the banking industry in India has not built up the cost data on any of its operational activities. Therefore neither an inter-bank comparison nor in-bank comparison for different operations could be attempted. An estimation of tne cost of operation of the a&ricultural lending scheme and other lending schemes of Syndicate Bank is made, based a study of a representative branch. The branch level costs included all the costs incurred on lending activities apportioned among various functions on a rough and ready basis. The Head Office cost loaded on them included the relevant administrative expenses, the premium paid to the Credit Guarantee Corporation and the cost of funds deployed. The estimated cost data relating to the year 1975 are as follows: 13 Report of the Study Group on Banking Costs, Govern-ment of India, Bombay 1971. 49 Establish- Other costs Cost of ment c ost including Total Tyeof LendingHOos (Per cent per annum of average outstandings) Agricultural Lendings 0.25 0.04 8.55 8.84 All Lendings 2.06 0.18 8.55 10.79 The cost of funds is the major item of the cost of lending ard it is estimated at 8.55 per cent for all types of lending. This is the cost at which the Bank is able to raise its resources through deposit mobilisation. The refinance facilities are usually obtained at 9 per cent for the eli.ible agricultural lending progra=.mes. The average cost of operation in the case of Syndicate Bank, the quick estimates reveal, is not very high eventhough a large complerient of staff is maintained to do the field wrk. This c culd be partly explained by the pattern of deployment of the field staff which is linked with the volume of advances made in a particular area. As the volume of credit supervised. by a Farm Representative is spread o-ver a number of branches, the unit cost would be reduced 14. Secondly, as a large volume of the crop loans and other advances to the agriculturists are sanctioned under the branch managers' discre- tionary powers on the reccmmendation of the Farm Representative, the 15. 1k rioinlwr Head Office cost is negligible . Thirdly, the prcmotiaal work 14 The establishment cost is considerably lower in the case of agricultural advances as th e cost includes only a part of the wages of the Fa= Representative arI a small portian of the manager's salazy. 'In the case of other advances, the establisnent cost of the full complement of staff of the branch is included. 15 This was a very prominent feature of the branch selected., as the results revealed. ...... ****,1*", 50 underta-en by the Bank though has.a positive impact on its operations, does not cost anth to tho Dark. The Bank makes only an annual 6grant of Rs.50,000 for the Syndicate Agricul- ture Foundation to undertake these activities. The Foundation has a large membership of farmers and has become financially self-supporting. The field staff of the Bank closely asso- ciate themselves with all the activities of the Foundation. Since the overall profitability criterion Suides the operations of the Bank, the profitability of the rural branches could be adduced as an evidence for the financial viability of agricultural advances. In the rural branches where the agricultuxal advances predominate, their opera- tional results reveal that they are making profit on their advances. Alternatively, the available financial data indicate that the profitability of the 3ank has not been hampered by the larger involvement of the Bank in agrical- tural lending compared to other banks. More detailed branch analysis of the profitability oi banking is made in a later chapter. A comparison of the Syndicate Bank's cost data with that of other banks is not possible due to tne absence of 4uolished data. Thou,-h the Study Group on Banking Costs nas iatnered some useful cata they are non-comparable. Secondly, as tze cost estimate given above is only a q.ick estimate, detailed inter-bank comparison would be redundant. S01E IIERENCES Syndicate Bank's experiences in the field of agricul- tural lending nave to be viewed necessarily a6ainst its 51 historical background and the environmental conditions. The current official policy is very favouraole to innovative banking in agriculture and other fields, unlike in the past when the Bank ventred into this f ield. The Bank's perf orm- ance can be allegorically termedas that of tilling an hitherto uncultivated land. The later developments axe only a stabi- lisation of the culbural practices aiming at an improvement in the yield. The weather conditions being favourable, there are more farmers now, tilling more lands and reaping good harvests. One notable lesson which could be of importance to the banking industry in the agriculture-dominated developing economies is the need for organising extension work as an essential part of the agricultural lending progrmes. The success of the agricultural lending would depend upon the income-rai sing capacity of the investment which in turn would be influenced by the receptivity of the farmers and their response to innovations in farming. In most of t4e agrarian countries, no doubt, the extension agencies function as a part of the A--icultural Department of the Government. Their effectiveness is somewhat limited, as they cannot provide the necessary finance to enable the farmers to adopt the new farm technolo6y. Syndicate Bank propagated the hybrid paddy Taichung Native-1 and IR-8 in South Karzxa district and provided the finance and guidance to the farmers who took up its culti- vation. The advantages of propagating the improved seed or farm practice are that they would enhance the farm income and the repayment capacity of the borrowing farmers. The advances for these purposes have better chances of being surbessful. 52 The 'Tarm Clinic" project is.-n integrated approach to tne farm problems by combining extension work, farm planning and±aput supply. Though the success story of this lone project cannot be taken up for generalisation, it has the potentialities for rural development. The major constraint in the adoption of such a project is that it cannot be taken up on a large scale by any individual banking institution. It has to be a selective village level project. Eowever, if liberal subsidies and the expert manpower could be provided by the state, the scale of operation of'this project could be extended widely. Another field where the financial institutions cater- ing to the needs of the farming community can do some radical thanking, is the inculcation of thrift habits among -ne borrowers. Though this philosophy has been accepted by Syndicate Bank, the achievements made appear to be not very impressive, as judged by the amount of deposits mobilised under a special savings scheme introduced exclusively for the agriculturists. The efforts made by the Bank in rural deposit mobilisation however, have been fruitful The commercial banks specially in the less developed countries can play a very important role in contributing to the economic welfare of the agricultural borrowers, if they are given not only the credit, technical know-how but also the inducement to save whatever is possible out of the additional income generated. 53 CHAP,T A ADVANCES TO SMALL BCRROWERS Syndicate Bank has among its clientele, a large number of small enterprises and small businessmen. These accounts have grown in number during the last few decades. The enviramental constraints which governed the operations of the Bank during its fOrmative years, left very little choice for the Ban,k to select its borrowers. The small tomns which it selected for opening branches could not pro- vide scope for large scale lendings. The narrow resource- base was the other limiting factor which induced risk- aversion. Small banks in those days refrained from taking the risk of making big advances where the failure of one account would adversely affect their working results as 1 the contemporary banking history reveals . And in view of the competition provided by the bigger banks, Syndicate Bank has chosen the less competitive market of small traders and small enterprises. Like,the small savings scheme in'iroduced by the Bank to raise resources, its lending was confined to small borrowers. Cradually with the opening of more branches in the industrial centres, port towns and metropolitan centres, there has been a change in the composition of the clientele of the Bank. There are now big industrial advances in major branches. However, the number of pestige borrowing accounts of big industrial houses handled by the Bank is very few. The big advances having credit limits above one million rupees are less tha 1000. The current policy of the monetary autho- 1 The author's study, "Regional Banking Growth :A Case Study of South Kanara", O.cit. 54 rities does not favour the weaning away of big accounts by banks from the existing arrangement through rate differen- tiation. The approval of the Reserve Bank of India is nece- ssar under the credit authorisation scheme, if advances per borrower exceed Rs.20 millions. Thus, the small advances which were supported out of necessity by the Bank in the beginning have now ccme to stay. After the nationalisation of banks, they are increasingly being called upon to take up "retail banking". Right frcm the rural artisan to the vegetable vendors in urban areas, are now censidered as creditworthy in the banking parlance. With a view to allay the fears of conventional bankers about the recovery of such loans, the Government of India has esta- blished the Credit Guarantee Organisation and the Credit Guarantee Corporation of India to guarantee a pre-determined portion of the losses of the banks lending to small borrowers. Various schemes have been formulated by the public sector banks to take up "retail banking" or "mass banking" as they are euphemistically called. 'The Differential Rate of Interest scheme introduced through the public sector banks especially reauire even the biggest bank to lend in small doses a small percentage of their advances at a highly subsidised rate of 2. interest of four per cent Syndicate Bank has continued i's policy to entertain the small lcan applications throu-hout the 2 The target set by the Goverment of India is half a oer cent of the total advances to be lent under this scheme. Syndicate Bank has crossed 0.60 per cent. 55 period during which the philosophy of retail banking has been evolved. There is however a significant difference in the context in which these advances are now made compared to the past. THE SmALL BCRROWERS Among the public sector banks in India, Syndicate Bank is one of the banks having the largest number of borrowing accounts. The total number of borrowing accounts handled by the Bank is 991,064 at the end of 1976. During the last 10 years, there has been almost a five-fold increase in the number of borrowing accounts serviced by the Bank. Accord- ing to the latest available data, the total borrowing accounts with the commercial banks in India are 7.35 millions as on December 1975. Syndicate Bank accounts for about 12 per cent 3 of the total borrowing accounts of all the commercial banks The details of the pattern of growth of the borrowing accounts of the Bank are presented in Table 1. In 1965 the number of borrowers of Syndicate Bank in the smallest borrowing group, i.e. .pto Rs.100, accounted for 30 per cent of the total borrowing accounts. In 1975, though there has been a decline in the percentage share of the borrowers in this group, in absolute terms, their number has 3 The number of borrowing accounts handled per employee is the highest in the case of Syndicate Bank among all public sector banks. It is 48 for Syndicate Bank against 14 for all banks. 56 TABLE 1 DISTRIBUTICN OF BCRROIAING ACCOUKTS 1965 1970 1975 Borrowing 1965 ------ Percnt- ero nt- Percent- groups No.of ag o No.of ag o No.cf get ageeore to~ age to total A/cs* total A/cs. total Below Ls.100 45545 29.70 54191 14.58 72721 9.77 Rs.100 - Rs.1000 75952 48.40 215494 57.46 416404 55-96 Rs.1000 - Rs.10000 28576 18.80 89969 24.21 216943 29.15 Above Hs.10000 4790 3.10 15901 5.75 58091 5.12 TOTAL 152665 100.00 371555 100.00 744159 100.00 increased appreciably. In the next borrowing group of Rs .100 - Rs,1000, there has been a sizeable increase. The increase is from about 74,000 to over 400,000. The big accounts having over Rs.10,000 per account constitute just 5 per cent of the total borrowing accounts. The Bank has onlr 100 acccunts which have borrowings of over Rs.10 millions per account. There has been a perceptible decline in the percentage share of the number of borrowing accounts in the size group of less than Rs.100. It has fallen from 50 per cent in 1965 to 10 per cent in 1975. As a general propositian this could be attributed to the inflationary trends prevalent in the economy, reducing the purchasing power and hence shifting upwards the demand for larger volume of credit. Secondly, 57 the shift from the smallest group to.-the second group of borrowing could be constructed'as an indication of the larger volume of credit availed'by the small borrowers at present. With the change in the emphasis from security- oriented lending to purpose-oriented lending which has come about since nationalisation, the banks are generally lend- ing a larger amount of credit per borrower than what he was 4 considered to be eligible earlier A skewed distribution of credit is a conspicuous feature of the pattern of credit disbursement of the bank- ing sector in India, despite the massive expansion in credit deployment organised by the banks in the post- nationalisation period. Over 90 per cent of the total bank credit are concentrated in about 8 per cent of the borrowing accounts. Syndicate Bank's credit pattern is not significantly different from this proposition, though it is relatively better as can be seen frm Table 2. The small advances - if the advances upto Rs.10,000 could be termed as small advances - constitute 18 per cent of the total advances of Syndicate Bank as against only 10 per cent in the case of all banks. The average amount of credit lent to the borrowers in the borrowing group of 4 The per capita bank credit in India has increased from Rs.68 in 1969 to Rs.209 in 1976. 5 In the Basic Statistical Returns introduced by the Reserve Bank of India which are in vogue since 1972, the classifications adopted are two less than Rs.10,000 and above Rs.10,000. 58 TABLE 2 THE PATTERN OF CREDIT DISBURSZWLT (Percentages) Banking Industry Syndicate Bank orrowng grus Ounts Amount Accounts Amount 1. Less thEan Rs.10p000 91.8 9.8 95.1 17.8 2. Above Rs.10,000 8.2 90.2 4.9 82.2 TO'AL 100.0 100.0 100.0 100.0 Source: Basic Statistical Returns, Reserve Bank of India, Bombay, 1975. less than Rs.10,000 is Rs.1065 for the borrowers of Syndicate Bank as against Rs.1482 in the case of their counterparts in the banking sector. An analysis of the ccupational classificatior. of the small borrowers would be of some significance in understa.d- ing the flow of bank credit. However, the non-availability of relevant data is the bottleneck. The available data for a very recent period are presented in Table 3. Among the small borrowers, excluding the agricultural small borrowers, the retail traders constitute the largest group accounting for 18 per cent of the total small advances. The "personal loans" given to all type of borrowers (wnose 59 TABLE 3 THE SIALL BORRMMS : AN CCCUPATIONAL CLASSIFICÅTION ( June 1977 ) Ac outts Amount Average Amount Occupational groups (Number) Outstanding Per Account (Rs.000s) (s.) 1. Retail Traders 65554 116717 1781 (10.8) (18.1) 2. Transport Operators 8168 24945 3054 (1.5) ( 3-9) 3. Professionals -38563 55375 1486 ( 6.3) ( 8.6) 4. Small Scale Indus- 8310 29546 3555 trialists ( 1.4) ( 4.6) 5. Miscellaneous 484174 417751 863 (80.0) (64.8) 604769 644334 1065 (100.0) (100.0) Notes: 1. The small borrowers are those in the borrowing group of less than Rs.10,000. 2. The agricultural small borrowers are excluded. 3. The data presented in this table pertain to only the small borrowers and hence they are less than the total advances made to each of the cecupa- tional group. This is more so in the case of small scale industries. 4. The miscellaneous group ircludes 205425 personal loan accounts with a total credit of Rs.188-75 millions. 60 occupations are not specified). account for 65 per cent of the total small advances . The amount lent is Rs.363 per account. The total small advances made to these occupational groups account for 12.5 per cent of the total ad.vances. The small scale industries receive another 13-5 per cent of the t otal advances. One of the obvious implications of the servicinG of the large number of small accounts is the increase in the cost of operations, specially the labour cost. However, in this cnnection, Syndicate Bank appears to have a rela- tive advantage of having a low-cost labour and a higher ratio of accounts handled per employee. Though the borrowing accounts handled per émployee is 48 for Syndicate Banlk as against 14 for all banks, the average emoluments per empl,ree is relatively of a lower magnitude f or Zydicate Bank when compared to many other banks . The average annual emolument per emplqyee in Syndicate Bank is Rs.10,100 as against the all banks' average of Rs.11,400. Even some of the smaller private sector banks have higher emolunents per employee. Syndicate Bank is ranked 22nd among the banks on the basis 7 of the total annual emoluments paid per employee . This cost-differential has a favourable impact on the Bank's financial results• 6 This includes also the advances made aginst gold ornaments in rural and semi-u.rban centres. 7 See "Comparative Perforance of 30 Mlajår Banks in 19761 by Centre f or Mon'ritoring Indiaa 1cconor, July 1977, Bombay. 61 ADVANCES TO SM2LL SCALE INDUSTRIES The small scale industries cover a wide variety of indus- tries and collectively they occupy a prcminent position in the Indian industrial scene. They have a tendency to spread all over the country as a result of the multiplicity of incen- tives- offered by the state governments. The special cca- cessions'offered to the new small scale units in the indus- trially backward districts have brought about a gradual dis- persal of small scale industrial units. Though big indus- tiial complexes are concentrated in and around big cities, mini industrial estates and small industrial units have emerged in many smaller towns. Syndicate Bank, like many other banks, has set up a separate Small Scale Industries Department in 1969 to service the small scale industrial advances. Nearly 100 young engi- neers from various branches of engineering ranging fran mechanical engineering to electronics are trained and placed in this Department. They are attached to selected urban branches bunched together for operational conveniences. Their res- ponsibilities include the guidance to the new entrepreneurs and supervision of the credit utilisation. The total advances made by all the commercial banks to the small scale industries-were about 8 per cent of the total bank credit in 1969. In the case of Syndicate Bank, this percentage was slightly higher at 11 per cent. The Bank was having 5932 accounts of small scale industrial borrowers and the total amount lent was Rs.101 millions on the eve of bank: 62 nationalisation. *The details .f the volurme of credit :ade availa:ble to the small scale industries by Syndicate Bank and other public sector banks fran 1969 to 1976 are presented in Table 4. TABLE 4 ADVANCS TO SrALL SCALE INDUSTIE SyndicateBank Public Sector Banks year (End.. -4c'eB ----------- Accounts Amounit Accounts Amount ing June) (Number) (Rs.Millicns) (iTumber) (Rs.Mllions) 1969 5932 101 50850 2508 1970 8601 158 81380 3695 1971 9478 175 100288 4422 1972 10592 215 115872 5285 1973 12269 264 158356 6418 1974 13825 355 201409 8683 1975 16054 429 229017 9427 1976* 22023 624 n.a. 12750 December. Source: Current Banking Statistics, Government of India, New Delhi, March 1976. During the post-nationalisation period, the number of borrowing accounts of the small scale industries with Syndicate Bank has increased considerably to 22,025 at the end of December 1976. There has been a six--fold increase in the 63 advances made to the small scale industries. The advances now stand at Rs.624 millions. The advances of all public sector banks to the small scale industries have also increased remarkably during this period. However, for all public sector banks, the share of small scale industries in their total advances is 12.28 per cent whereas it is slightly higher in the case of Syndicate Bank at 13.50 per cent. SELF- O T CLINIC One of the recent innovations introduced by the Bank is the "Self-Employment Clinics". In this programme, "Clinics" are organised by the Bank in a number of urban centres in India, inviting the local educated persons to come to the Bank for vocational guidance and financial assistance. This is a purposeful campaign conducted for a specific period in selected centres by advertising about the same in the local newspapers well in advance. The technically qualified persons are invited to come to the Bank during this period with their proposals if any, for starting their own independent vocations They are given the necessary guidance by the technical experts of. the Small Scale Industries Department of the Bank and the project reports are then prepared. After discussing the project with the candidates, the necessary finance is also being made available by the Bank. So far, the Bank has held 80 such self-employment clinics in different -arts of the country at different times. The total number of candidates who have been guided and given financial assistance at the 64 clinics is 4577. The total amount of credit lent by the Bank to these persons is Rs.137.70 millions at the and of December 1976. These campaigns have been able to provide 8 employment to 16,400 persons so far For organising the self-employment progammes on a larger scale the Bank evolved in collaboration with the Indian Jaycees a joint programme popularly known as "SEE Programme" - "Self-Employment Endeavour Programme". Under this programme, the Indian Jaycees, one of the nation-wide organisation of youth in India, are identi- fying the young entrepreneurs who are interested in starting some self-employment ventures with the help of the Bank. The necessary guidance and financial assistance would be offered by the Bank for setting up any one of the 48 self-employment schemes suggested by the Bank. This scheme is sponsored by the Jaycees through their local chapters where Syndicate Bank has its branches. Under this programme, 704 self-employment ventures have been promoted and an amount of Rs.18.60 millions has been sanctioned. IRREGULARITIES There are very few published studies or data available which throw some light an the extent of irregularities i the advances made to the small borrowers and the selfTemployed persons. Banks in India shy away from publishing any such data which would reveal the stickiness of their advances. 8 Syndicate Bank - Annual Repdrt for 1976. 65 The Guarantee Corporation which gathers these information from the member banks also does not publish them in any classified form. This could be perhaps to assuage the borrowers psychology from aggravating the repayment irre- gularities. In the case of Syndicate Bank, a small sample survey (unpublished confidential report) provides some information about the extent of irregularities specially in the advances 9 made under self-employment programmes . Selecting a sample of 323 units financed by the Bank in the two states in India, the avaluation study probes into the factors respan- sible for the irregularities in the loan repayment. Detailed replies were collected from the selected units regarding the various factors which according to them were responsi- ble for their irregularities. It was observed that diversi- fication of the funds for purposes other than they were intended was one of the main factors followed by the lack of entrepreneurial skill among some of the borrowers, respon- sible for the poor performances of the self-eiployment ventures. An inverse relationship between the extent of capital partici- pation by the borrowers and the magnitude of irregularities in their accounts has been noted. Where the borrower has a direct stake in the success of the project, where his own capital also is employed besides what is borrowed from the Bank, he subjects himself into a more disciplined dealing with the Bank. The financial requirements are fully met in such 9 Self-Emplorment Scheme : An Evaluation, an unpublished report of the Economic Research Department, 1976. 66 cases in consonance with the soci6-economic objectives enunciated in the scheme. The risk involved in such advances are covered by the Credit Guarantee schemes sponsored by the Reserve Bank of India. RISK COVERAGE In order to provide risk insurance to the banks lending to the small borrowers, the Credit Guarantee Organisation (1960) and Credit Guarantee Corporation (1971) have been established by the Government of India. All the eligible credit facilities granted by the financial institutions to the small borrowers and small scale indus- tries are automatically covered by these two agencies. The available data indicate that at present nearly 79 per cent of the total priority sector advances are covered 10 by the Credit Guarantee Corporation0. The details relat- ing to the coverage of Syndicate Bants advances by the Credit Guarantee Corporation are given in Annexure 4.1. It is however not possible to comment upon the rela- tive efficiency of loan management under the guarantee cover and outside it. The present reporting system in the banks make it almost impossible to ascertain as to whether the loans covered by the guarantee are more regular than the non-guaranteed accounts. Nrovision for the bad and doubtful debts is a statutory obligation and every bank has to provide 10 Fifth Annual Report of the Credit Guarantee Corporation of India Ltd. 1975, Bombay, See pages 8 and 10. 67 for the same in its annual balance sheet. The financial accounting system adopted by the Indian banks is shrouded in secrecy and hence these details are not available for any banking company for a detailed analysis. This is true in the case of Syndicate Bank also. The advances covered by the Credit Guarantee schemes cost to the Bank in two ways. The small advances covered under the Credit Guarantee Corporation are made for the small borrowers at a rate of half a per cent lower than those charged for the non-C.G.C.advances. Secondly, the Bank has to pay a premium cn the advances covered by the guarantee. The annual premium paid forms a substantial amount, as the Bank has a large volume of small advances. The annual premia paid by the Bank has increased considera- bly from Rs.0.44 millions in 1971 to over Rs.2.13 millions in 1975. The guarantee premia paid by the Bank' is almost equal to about 30 per cent of the total net profit of the Bank. In the absence of the payment of this premia, the profit of the Bank would have gone up by another Is.2 millions. B:owever, on the other side, the need for making provision for bad and doubtful debts out of the annual profits is reduced to the extent the Credit Guarmantee schemes guarantee the advances made by the Bank. The utility of the Credit Guarantee schemes, to borrow an analogy, is like the useful- ness of the fire-fighting device. Under ordinary circumstances, one cannot assess its usefulness until the debts become irre- coverable and compel the banks to invoke the guarantee with the Guarantee Corporation. As the Corporation guarantees 68 75 per cent of the total loss of the banks, the latter are provided a safe cushion in their operatiorns relating to the small borrowers and small scale industriese COST OF OPERATIONS As exlained earlier in the case of agricultural lend- ing, the cost of operations of small advances is estimated in the same manner. The limitations of the method of estimate may be borne in mind while ccmparing the relative operating costs of various lending schemes. A brief review is made here as a more detailed analysis of cost and profitability is made in a later chapter. The operational cost of the small scale industrial advances comparesfavourably with that of large scale advances. The other small advances are relatively costlier to operate as can be seen from the following taole: TABLE 5 OPEMATIIG COSTS OF LETDII'G SC4EMS Cost of credit per cent per annum Small Scale Industries 8.89 Retail Trade, Small Business, 10.77 Professionals & Self-employed Road Transport Operators 8.75 ALL ADVANCES (Average) 10.79 69 The cst of operating the lending schemes pertaining to retail trade, small business, professionals and self- employed persons is higher than that of smallxale indus- tries (gZ road transport operators. The average cost of lending under all types of advances is estimated to be 10.79 per cent. With the average rate of interest charged an,various loans ranging between 12 - 17 per cent, each of the lending scheme appears to have a margin. The margin in the case of small scale industries is about 4 per cent (average lending rate being 13 per cent and the ccst of lending being around 9 per cent). As for the heteroge- neous group of retail traders, self-employed and others, the interest rate charged is also 13 per cent. This leaves a margin of aocut 2 per cent. Though it is not realistic to expect precision in the estimates of the spread between the cost and return in individual types of lending progra- mmes (due to the limitations of the method of estimation) the results would indicate broadly the viability of the lending schemes of the Bank. If the spread is higher in some cases, it amounts to subsidisation of other schemes. In estimating the cost, the cost of irregularities or the cost of writing-off the bad debts are not taken into account. The wider margin estimated would take care of the provision for bad and doubtful debts. The interest rate structure of advances provides con- cession of i to 1 per cent to the small borrowers, specially 11. , ,-rbroesaemd under the priority sectors11 The bigger borrowers are made 11 The details of the interest rate structure are given in Annexure 6.1. 70 to pay one per cent more on. their borrowings, the purpose of 1can being the same. This method of subsidisation has a beneficial impact an the profitability of the Bank's operations, as the lower rate of interest in effect is applicable to about 42 per cent of the total advances only. SOYM INFERENCES Syndicate Bank has in its credit portfolio a large percentage of small advances, industrial and non-industrial. The Bank was entertaining these accounts in the beginning, out of necessity in the context of the Bank's operations being spatially confined. Later on when the Bank's. net work of branches extended into the metropolitan and indus- trial centres, there has been a gradual shift in the pattern of advances, in which large advances also figure. Since its entry into the foreign exchange business, the Bank has expanded its industrit1 advances. These advances require high financial expertise and also large volume of resources. The Bank's policy of credit deployment in recent years appears to be trying to have a combination of both small and big advances unlike in the pasta The Credit Guarantee schemes which have cae into being during the last decade have enabled the Bank to obtain the guarantee cover to a large number of its small advances both to the priority sectors and to the small scale industrial sector. It is, however, not possible to infer from the set of information available, both published and unpublished, as to whether the Bank has 71 been able to enhance its small advances specially can account of the availability of the guarantee cover. Guarantee cover, no doubt, has provided a cushion to its lending operations but it also involves a cost. The operational costs of the small scale industrial advances compare favourably with those of large scale industrial advances. The other small advances are rela- tively costlier to operate. As they come under the priority sectors, the rate of interest charged is slightly lower. Then there is the guarantee premium to be paid. Hence the margin available is narrow comrared to other type of advances. However, since the banks operate as a multiproducts industry, they can compensate the lower margin in one type of advances by the wider margin avail- able in other lendings. This implies notionally a subsi- disation of the small advances through the higher revenue earned frm bigger advances. Profitability of overall operations could be influenced through the pattern of utilisaticn of the loanable resources. As the profit ma0misation is not the most preferred corporate goal specially for the public sector banks, they can afford to subside implicitly, the socially desirable small advances to the priority sectors. Syndicate Bank's operaticnal results reveal that though the Bank has a substantial priority sector portfolio, its profitability is not adversely affected in coparison with other public sector banks. 72 CKAPTER 5 ECONOMICS CF BRANC EPANSION Branch banking is the long accepted policy governing the operations of the banking industry in India. Before the Banking Companies Act of 1949 was introduced, there were a number of unit banks, originated through local pat- riotism, functioning in smaller towns specially in the southern states. During the formative years of banking, these banks were free to select centres for opening their branches. The regulation of branch opening was introduced first in 1946 through the Banking Companies (Restriction of Branches) Bill, which come into force from November 22, 1946. This was originally intended to control the huge number of branches opened by various banks during the war period. This Act made it compulsory for any banking company to obtain the permission from the Reserve Bank of India before opening a new branch or changing the location of the existing branch. The Reserve Bank of India was required to take into consideration "the financial condition and history of the Bank, the general character of its management, the adequacy of its capital structure and earning prospects as also the advantage 1 to the public following the opening of the-branch" . The Reserve Bank was also empowered for this purpose to arrange for the inspection of the books of accounts of the banks, 1 Statistical Tables Relating to Banks in India and Burma, 1944 & 1945, Reserve Bank of India, Bombay, 1946 - pp.X. 73 with the -orior ayproval of the central government. This pro- vision was later incorporated in Section 23 of the Banking Companies Act 1949. Since then the branch licensing policy of the Reserve Bank has remained as an operative valve regulating the pattern of dispersal of bank branches in the rural and urban areas. Despite the branch licensing policy tilted in favour of rural branches, after two decades of its operation, it was found on the eve of bank nationalisation in 1969 that large parts of rural India remained unbanked. Banking has been essentially an urban-oriented service and it has con- centrated in the metropolitan and urban centres. In grant- ing licences, the Reserve Bank of India was insisting upon the banks to open two rural branches to qualify themselves for obtaining one urban licence. The reluctance of the banks to move out into the rural areas was influenced largely by the notion that the rural banking would be uneconomic. The State Bank of India which was nationalised as early as in 1956 was charged with the responsibility of opening a large number of rural branches and the losses incurred in these branches were borne by the Reserve Bank of India. Other commercial banks were not given ary subsidy to set off the losses and hence very little progress was achieved in rural banking. With the nationalisation of 14 major banks, it was decided to minimise the regional imbalances in the spread of bank offices and the availability of banking facilities in different regions of the country. The Lead Bank Scheme 74 was introduced by the Government-of India in 1971, allotting various districts in the country to the nationalised banks 2 for intensive banking development . This scheme was designed to Øring about an even spread of banking activities among different regions by fixing the responsi'ilities on the lead - banks. The criteria adopted for the allocation of districts were the,size of the banks, thei= branch net work and the contiguity of distriets to be allotted. Since January 1977 the licencing policy of the Reserve Bank cf India is to ;rant one licence for a metropolitan and urban branch for every four branches opened in unbanked rural centres. The factors which influence the branch expansion deci- sion of a bank are the business prospects and the locational conveniences of having link branches which wouJd conTribute to an expansion of business. However, the banks cannot select all the centres purely on the basis of their anti- cipated cost-benefit relationships. Their choice is re- strained by the conditions stipulated by the licensing authorities for opening urban and metropolitan branches and their lead bank responsibilities. In the lead districts, often tii lead bank has to content itself with the lower crder centres allotted to it for opening the branches It does not get any preferential treatment in the issue of licences for urban 2 "The Lead 2ank Scheme - Progress and Prospective" in the Reserve Bank of India bulletin, Bombay, November 1970, pp.1917-1928. 5 There is a growing tendency among the state governments to treat the bank branches as an "infrastructure" like trans- port and communications. Banks are often called upon to consider even very sall places for branch opening. 75 centres in these districts. All the banks have to submit their 5-Years' rolling branch expansion plans to the Reserve Bank of India in advance. The banks thus have to manage with a manoeuvrable mix of branches, which has a slant towards the unbanked rural centres. Against these macro-constraints, the economics of the branch expansion programme implemented by Syndicate Bank are analysed in this chapter. The changes in the profitability of the Bank arising out of the branches opened after bank nationalisation in the lead districts are examined. Tne area approach adopted by the Bank in its branch expansioL programme is also reviewed. As branch-wise profitability is a guaea secret among the banks in India, an inter-bank comparison is not attenmted. BRAFCE BAEKING A branch has been defined in the Banking Companies Regulation Act (1949) as a "new place of business". As an operational unit, there is no homogenity among the branches in their staffing pattern, their pattern of'credit deployment and the volume of the business handled. The uniformities relate to only the rates of interest charged on various advances and the interest rates offered on deposits. A number of experi- ments have been made by various banks in staffing the branches specially in the rural areas with a view to keep down the over- head costs. One man branches, mobile branches or sub office or pay office which undertakes only a limited number of bank- ing transactions are some of the types-of branches introduced. The "extension counters" opened in the selected localities as 76 an extension of the main branch transacting only a few bank- ing operations, are another variant of branch banking. The extension counters are invariably in the metropolitan and urban centres while the one man branches or the mobile . 4 branches are in the rural areas. Syndicate Bank experimented with one-man branches in 1946, just before the restrictions on branch expansion were introduced. Selecting 27 rural centres in South Kanara district, the branches wer.e opened under the management of "rural representatives", who were mostly the local persons like school teachers, petty merchants and retired government servants. The branches were located in the houses or shops of the rural representatives. The services of an influen- tial person who had considerable experience in mobilising war support under the British government during the Second World Wax were utilised for organising the rural branches. The agents were paid Rs.30 per month and certain percentage on the revenue items. Banking transactions were handled on a restricted basis. Deposits were accepted and loans were given on the security of deposits and gold ornaments. Drafts were also issued, signed by the managing director and not by the rural representative. The establishment cost was kept at a low level as there was no rent and salary psyments. The performance of these branches was determined by the efficiency of the person in charge and the business prospects of the locality. A few of the branches were closed after a 4 Syndicate Bank has not experimented with the "mobile branches" in its branch expansion programme. "One Man Branch" has been preferred instead of mobile branch. 77 couple of years, while in most of the centres, they could not cater fully to the requirements of the villagers. The.mer- chants specially ha to depend upon the branches in the towns than deal partially with these branches. Over a period of about 10 years, they were upgraded one by one into full- fledged branches. The strategy adopted by the Bank is that of establishing full-fledged branon rater than having one-man branch or a mobile branch. And branches are opened in clusters in sele- cted regions. In the metropolitan centres where there is scope for mobilising deposits, the Bank has a policy of opening extension counters. They operate more as "service points" to serve the depositors. In this study, therefore, the economics of branch expansion of Syndicate Bank are examined with particular reference to its net work of bran- 5 ches, spread over different demographic and geographic regions PROF ITABILITY ANALYSIS The analysis of the profitability of branch level opera- tions may be attempted in 3 stages. First, the profitability of all the branches classified into standard groups on the basis of the demograhic details may be reviewed. Secondly, the profitability of the new branches opened after the nation- alisation of banks may be analysed. Thirdly, the profitability 5 The Bar-k has at present 90 extension counters. However, uner its accounting procedure, the operations of the extension counters axe accounted uaer tie base branones. .78 of the branches in the Lead disti'icts and non-Lead dist- ricts could be examined. In the first instance, the location of the branch in different demographic zones is expected to influence its scale of operations and hence its financial results. This could be a general analysis of all the branches irrespective of their age group. In the second type of comparison, the emphasis is on an assessment of the profitability of the new branches. It is commonly believed that the branches in the post-nationalisation period are opened for considerations other than commercial 6 viability alone . It could be therefore analysed as to wtetner the new branches opened since 1970 have been able to earn profit and if so wnat is cne gestation period? The third comparison relate's to the relative levels of profita- biliTy attained by the branches opened in the Lead and non- lead districts. Here also the common notion is that in the lead districts the banks have to open their branches to fulfil certain lead bank responsibilities necessitating the opening of branches in unbanked centres. As a result of this, it is likely that the gestation period of such branches would be larger than what is true for the branches opened on purely commercial consideration in the non-Lead districts. BRANCH PRCFITABILITY The volume of business handled at the branch level is one of the major determinants of the profitability of branch 6 Since nationalisation, the commercial banks have opened an enormous number of branches 12,899, of which 5827 are located in rural areas. 79 banking. The low business potentialities in the rural areas usually prolong the gestation perioa of the brances which operate at low levels of business. In the urban arni metropolitan centres, the branches would be able to secure a reasonably large volume of business in about 2 or 3 yearst operations. The average depo.sit handled by a rural-branch in Inu-ia is Rs.1.60 million as against Rs.18.30 million in the case of metropolitan branches. As vega=ds the volume of credit handled per branch, it varies from Rs.0.80 millions in rural India to Rs.17.60 millions in metropolitan centres. Compared to these averages, Syndicate Bank's branches appear to be operat- ing with higher volume of business. The relevant details pertaining to the Syndicate Bank are given in Table 1. TABLE 1 PER BRANCE AVERLAGE BUSIES HANIDLE (Rs Jillion) Branch Category Deposits Advances Rural 2.05 1.52 Semi-urban 4.77 3.0 Urban 9.23 5.75 Metropolitan 16.28 13.56 ALL 31RA0M, S 6.76 5.04 80 Besides the faizly hIgh volume of business handled, the branches of SynMdicate 3ank also reveal the higher level of resources utilisation. The -wverae credit-deposiz ratio £ or the rural branches of ,ne aik is 74 per r. et as agirst all bar-s' avezabe of 52 oer ce nt for the rural brancnes. This has a desirable impact on the profitability of the rural branches of the Bank. The concept of "prof it" wnich couic. be considered io'r branch level profitability analysis nees a word of erpla- nation. Tne concept of "uItimate prof it" adopteid for this purpose relates to the financial resuIts obtained at n.e branch level, both on account of its depos.t mobilisation function and credit disbursemen-t Punct-ior. As exla2ned earlier since some of the branches would have surplus re- sources whic2h are available to the 3ank ffor deploy-ent elsewhere, in the accounting system adopted-, a transfer price is used to impute tle return on the resources trans- ferred. The ultimate profit thus derived includes an interest income notionally accruin- to the branch having sur-clus cf loanable resources. This is the accepted con- cept of branch prof italbility among' the indian banks though the transfer price used is not the sae by different banks . As the branch level ,rofitabilit¡ is largely influen- ced by the extent oJf resource-utilisation by the branches, T 7. the patte.n of resource-use may be a=_=lysed : irst This may be measured in terms cf the credit-de-osit ratio. This ratio itself is ir.luenced by a number ofaoctors. The spatial locatica- of the branch, its age and the local economiic 7 The resources at t:e branc-' level comprise o: only zce deposits mobilised an the fund.s obtained from ,ne heau off ice inen reouired. 81 environment are the important factors regulating this ratio, The credit-deposit ratio could be some-uhat elusive in cases where the branches operate at a very low level of business. turnover. The ratio could be high in such cases without necessarily reflecting the profitability of the branch's operations. Another limitation of the credit-deposit ratio is that it conceals the differences in the deposit-mix as well as the credit-mix of various branches. The credit-deposit ratios are worked out for the rural, semi-urban, urban and metropolitan branches of Syndicate Bank for the yea= 1975. An examination of these ratios reveals wide variations among the branches in the utilisation of the resources mobilised locally at the branch level. The relevant data are given in Table 2. It may be seen from the table that in 64 branenes located in the rural areas, the utilisat.on of the a.eposits mobilised in the branches is upto 40 per cent only,, 0 If 70 per cent of resources-utilisation is accepted as roughly the extent to which branches can lend, then 44 per cent of the rural branches of the Bank fall below this level. In the case of the semi-urban branches, (Population 10,000 - 100,000) the percentage of branches in this category is 56. Even in the urban and metropolitan centres there are about 60 to 80 per cent of branches belonging to this category. In the rural areas there are over 93 branches out of 290, where the credit-deposit ratio is over 100 per cent. 82 T ALE 2'C SOU0JRCE~S UILISATION DiT SY7.DICATI 21Js BAN0EE~S (As on Dece=,er 1975) Branches (2Tuber) Credit-Deposit -atio Rural Semi- Urban etro- Total Percent age) ur ban - olit an Below 40 64 44 49 80 257 40 - 50 20 26 .7 15 68 50-60 21 26 15 12 74 60 - 70 24 24 16 11 75 * 70 - 80 25 15 8 5 49 80 - 90 26 21 9 4 60 90 - 100 19 14 5 2 40 Above 100 93 48 18 16 175 WITAL 290 216 127 145 778 These are the branches where the deposits are slow to gro, but where enough scope is available for lend4ing specially to the agricultural sector, and other village arÉ cottage industries. Siilarly, in the case of 48 seni-urban bran- ches, the credit-d eposit ratio is over 100 per cent, Thus it is not possible. to generalise whether the rural branches are tapped by the Eank only for the transfer of funds. F'or the sank as a whole the total deposits mobilised by the rural branches are s.659.95 millions as against the total advances of Rs.418.22 millions. The credit-deposit ratio thus works out to be 65.4 per cent for the rural brances of the 8 Bank Similarlr for the semi-urban branches the extent of 8 The public sector banks are now required to azta:.n a cre.it deposit ratio of a0least 60 per cent in the rural branc;.:es bef ore liarch 1978. 83 fund utilisation is 61.6 per cent.. It is higher at 80 per cent for the metroDolitan branches. The inter-branch profitability differences are largely influenced by the relative size of the business hanaled as there is broad uniformity.among the cost components. There axe no differences in the rates of interest offered on deno- sits and interest charged on advances based on spatial considerations. The establishment costs axe nearly uniform because of the standard pay scales, except for tie differences in the allowances paid in -ce rural and other branones based on an agreement reached with the working staff. The rent paid for premises is an important cost item whicn varies signi- ficantly between the rural and metropolitan branches. The relative level of profitability of a branch therefore is determined mostly by the volume of business handled than the cost of operations. The volume of business transacted at branch level is a function of time. The financial results of the branches may be thus analysed by classifying them on the basis of their ages. Barring exceptional cases where the establishment cost of an old branch increases with the tagging on of some non-revenue earning administrative fun- ctions, the profitability of a branch increases with the in- crease in the number of years of its operation. The details of the number of branches making ultimate profit and ultimate loss in different age jSoups in each category are furnished in Table 3. It could be seen from the table that 502 branches out of 778 branches are making profits. Out of the 276 loss in- 84 curring branches, 115 'oranches are in -une age group of less than 2 years. The 'gestation peri.dd' in the case of 70 bran- ches seems to be larger than normal, upto 5 years . Out of them 42 branches are in t.he rural areas. There are still 19 branches which have been in operation for over 15 years, 9• yet incurring loss. Over half of them are rural branches9. Their losses however are of a lower magnitude as can be seen in the next table,. TA3LE* ____E QF P2CFIT NAIENG M!D LOSS IliCUhI.1:ï7C Bi.7TCE~S (Number) Age of the 7,=c ~ual Semi-irban Urban 111-etoolitan To t al Eranch L 7 L p L P L P L (In Yea-Lrs)~ Below 1 3 27 - 11 1 10 4 11 8 59 1- 2 2 26 6 13 5 9 3 8 16 56 2 - 5 22 42 38 10 18 10 31 8 109 70 5 -10 75 39 55 16 23 3 43 5 196 63 10 -15 13 3 24 3 6 2 11 1 54 9 Above 15 24 10 55 8 29 - 11 1 119 19 TOJ L 139 147 178 61 82 34 105 54 502 276 P = Profit earnin- branches ; L = Loss inurring branches. 9 Lack of business pro;pects ana. the narrowness of the command area of the branch due to the existence of utner ban.« wranches account fcr the inancial osses or most of tese branches. 85 The gestation period of urban and metropolitan branches is of a shorter duration compared to the rural orancnes on an average. In the third year of operation, these branches start earning more revenues than their expenditure. Out of 778 branches, 313 branches are relatively.younger branches whose age is upto 5 years. A review of the financial results of the profit making and loss incu.ring branches may be now attempted. The rele- vant data pertaining to the ultimate profit per branch for the profit*making branches and ultimate loss per branch for the loss making branches axe presented in Table 4. The aerage profit for the profit making branches works out to be 0s.0.37 million, as against the average loss of the loss making branches of Rs.0.03 million.. The average . prof it per branch range from Es.37,000 in the case of new branches to Es.628,000 in the case of the established bran- ches. The variations in the magnitu;de of losses axe confined to a narrower range - Rs.20,000 to os*42,COO. The average profits for the rural branches are Rs.80,000 while they go up to 1s.1.12 millions in the case of the metropolitan branches. In each category of branches, the per branch average profits are larger than the average losses per branch. Comparative data for an earlier period are given in Annexure 5.1. Though the banks strive to maximise their aggregate profits, maximisation of the profits of each of the bran- ches is normally not feasible. This wculd be perhaps attain- 86 able in an ideal situation wnere all the brarches are homc- genecus units. TALE =5 PRCEITS A22) LOSSIS C ->=7PEEEI : S :19" (Rs.000's) Age of the Rural Semi-urban Urbar Metroolitan- Total Branch p L B L L p L p L Knyears) Below 1 3 9 - 1 neg• 14 71 2 37 20 1 -2 41 27 74 29 105 52 3692-* 101 758 42 2 5 56 17 87 15 322 52 55 40 251 24. 5 -10 78 18 144 52 332 54 671 28 256 24 40-15 107 20 178 60 320 67 1277 23 402 44 Above 15 1C8 26 254 53 509 - 3945 108 628 42 ATý AGE 80 18 168 29 375 42 1119 64 372 29 P = Profit mer branch for the -rofit maKing branches L = Loss Per branch for the loss incurrig branches * This exceptionally large value is the result of the 'ran r os . accounts in respect of one Ibranch. One of the advantages of branch banking is terhaps the scope Lor s-reading the risks over the branches in dif"erent areas. inoidentally, very rare!y do the banks in India close down the 110 loss making branches . This is partly because of the bankers' optimistic exectations of the future perfornances of such 10 The total number of branches clcsec. during 1975 is cnly 63 as against the total number of 2338 new branches openeCL during te year. See Statistical Tabies Relating to `anks in India 1975, ha1 Eombay pa-e 44. 87 branen.es and rartiv to mainzain CheOr Cage. The nev branches opened by the'Bank fter nationalisa- tion on July 19, 1969 may be consicered separateiy for an examination of theiz prof itability. The thruzt i branch expansion sta.ted actually during 1970 and after. Only after the allocation of the lead districts ana the completion of tne identification surveys of inbanked ;rorn cenires, all banks incluaing Syndicate Bank startec. opening orancnes on a large scale. There.fore, for this gtudy, only the new branches opened by the Bank during 1970 are consiåred. As many as IC6 new branches have been opened this year. The performance of these branches during the five yeaxs 1970 to 1975 is analysed in what follcws. The growth in the volume of business handlåd by the new branches is taken up first. The average auantum of deposits mobilised by these branches and the volume of credit dis- bursed by them are compiled for each of the years for the 106 branches. The data are presented in table 5. The volume of business hannled by the ner branches has increRse. conskaeraoly during the period under study. The rural branches' perfor=ance is dood enouph as the advances made per branch have kept pace with the growth in deposit mobilisation i. The volume of deposits raised in these branches cross the one million rupee level during the fith yeaz of operation. 11 Accorcin, to a stucy of the ieserve EanK of india, covcr.:.ng the period July 1969 to December 1972, the deporits mob...lisea and credit disbursed per branch are Em. 1.3 millions and 0s.0.60 millions respectively. The corresponding figures for Syndicate Bank are hiher than these averages, See Reserve Bank of India Bulletin, January 1974. 88 TABL= VOLUIÆ CF BUSINESS HM-)LED BY NEW BRAEEES (Rs.000's) Bus4rness 1.970 1971 1972 .1973 1974 1975 Handled a. Rural Branches DeDosits 209 451 715 1C60 1337 1622 Advances 146 429 577 955 1174 1513 b. Semi-urban Branches Deposits 602 1498 2439 3602 4293 5239 Advances 323 925 1491 ^2726 3221 3691 c. Urban and MetroDolitan Eranche s Deposits 1334 3098 4522 6449 7999 10080 Advances 321 722 1986 3534 4427 5497 Source :"Performance of New Branches : An Appraisal" in Pigmy Economic Review, February 1975. The figures relat ing to the operational dynamics of a rural branch, Allur, selected from the evaluation study of the new rural branches are furnished in Énnexure 5.2. The semi-urban branches attain this level during the third year and the branches in urban and metropolitan areas are found to be crossing this level almost during the second year itself. The steadily growing volume of business has resulted in the improvements in their profi tability. 89 The profits made by the 106 new branches from 1971 to 1975 are analysed separately for j.he rural, semi-urban and urban branches. As the disclosed aata at the branch level relate to only ultimate profits and ultimate loss, the ana- lysis is inevitably confined to the ultimate profit of the brancnes. The relevant data are oresented in Table 6. During the first year of operations, out of tre 106 branches only 17 coula earn some profits. The operations of these branches during the fifth year reveal znat about 70 per cent of the branches are making profits while about 30 per cent still incur losses. Out of the 34 branches in this bracket, 26 are located in rural areas. The loss incurred by these branches is however not very large. Two of the plausible inferences from the array of pro- fitability data presented in the above table are that the profitability per branch is of a higher magnitude in the case of the urban branches and secondly, the new rural 12 branches have a longer gestation period . The total losses of the loss incurring rural branches have shown a tendency of declining slowly. In the first year the losses of the rural branches were 1119 per cent of the profits of the profit making rural branches. They have fallen to 16 per cent in 1975. The losses of the urban branches ar less than 3 per cent of the total prof its of the profit making urban branches. 12 The gestation period, varies from 4 to 5 years in the case of the rural branches of some of the public sector banks, See "Rural Banking and Profitability" by Dr.D.N.FSaxena in "Banking Development for Economic Growth" edited by Dr.-N.K.ThingaLaya, Manipal 1975 PP.58- 90 TABLE 6 PRCF ITABILITY CF IW BPJN CE Year Rural Semi-ur an Urban/Me Total politan a. Number of Branche s 1971 P 8 3 6 17 L 57 13 19 89 1972 P 22 10 13 45 L 43 6 12 61 1973 P 27 11 15 53 L 38 5 10 53 1974 P 34 11 17 62 L 31 5 8 44 1975 P 39 13 20 72 L 26 3 5 34 B. Averape Frofit/Loss (Rs.000's) 1971 P 10 26 51 27 L 16 21 36 21 1972 ? 17 43 108 49 L 15 14 24 17 1973 P 28 58 149 68 L 16 16 40 21 1974 P 54 186 299 145 L 22 14 43 25 1975 P 78 225 385 189 L 19 22 47 23 P = Profit. L = Loss. 91 PRCFITABILITY & LEAD DITRICT BPAHES Out of the 106 new oranches opened by the Bank in 1970, 60 are in the Lead districts. The accent in the branch ex- pansion programme in the Lead districts being on tMe cover.- age of unbanked centres, 35 of the nei branches are in the rural areas. In the non-Lead districts, 23 out of 46 new branches are in urban centres. The financial results of these branches are analysed with reference to 1975 allowing for a period of 5 years as the gestation period. The details are given in Table 7. TAML ' PRITILITY CF TEE WE7 BRAEES 7 (Leak distriets and Non-Lead Districts) Indicators Rural Semi-urban Urban Total a. Lead Districts No.of Branches P 24 11 37 L 21 2 23 Average Amount 77 238 130 191 (Rs .000's) L 18 33 - 20 b. Non-Lead Districts No.of Branches P 15 2 18 35 L 5 1 5 11 Average Amount P 78 152 285 188 (Rs.OOts) L 18 1 47- 30 P = Profit. L = Loss. The average profit per branch for the lead distriots branches is slightly higher than the corresponding figures for the branches in the non-lead districts. The loss per 92 branch in the lead districts is lower than the loss per branch in the non-lead districts. The profitability levels of the rural branches in both the lead and non-lead districts seem to be almost-the same. Only in the case of the profi- tability of The urban branches, those in the non-lead dist- ricts have a fair margin above the urban branches in the lead districts. The profitability of the rural branches could be attributed to the better fund utilisation. The rural branches have accepted the priority sectors as the outlets for investment. Greater the percentage share of priority sectors in the rural branches, larger are their profitability, the transfer price being lower than the rate of interest charged on priority sector advances. The infer- ence from this analysis possibly therefore is that the branch expansion in the lead districts does not necessarily hamper the overall earning of the Bank. Inter-bank comparison of the branch level profits however cannot be attempted due to the conspicuous dearth of tne published, data. SOUTH KNARA - AN EXAlPLE OF ITEISIVE BAKIG Syndicate Bank has adopted for its branch expansion programme a policy of area appeoach in which a cluster of branches are opened in an area with a view to ensure that the Bank's activities make a tangible impact on the economy of the region. Much before the Bank was designated as the Lead Bank for the district, it has made South Kanara as its laboratory for experimenting with its unorthodox banking practices. The Bank has a net work of 89 branches in the district, of which 27 branches have already celebrated their silver jubilees. Out of the 89 branches as many as 69 bran- ches are in the rural areas. fhe rural branches of all 93 banks in the district are numbering 190. Syndicate Bank's share in the total number of rural branches is of the order of 35 Per cent13. Accordin- to -ne stat istics available, at the end of Lecember 1975, the total deposits mobilised by all the commercial banks operating in the district are L,.973 millions. The total advances made by them are of the magnitude of Rs.623 millions. The total number of bran- ches is 517 at the erd of December 1976. South Xanara dIstrict is pernaps tne on-y one district of its size in India (Population : 1.94 millions accordin to 1971 census) to have over 340 branches of various commercial banks. The population per branch in the districtt -orks out to be 7,00 as against the national average of 27,0CO. This could be construed as an index of the inte nsity of 14. banking development in the district . Because of its lonj association with the district, cefore the introduction of tne Lead Bank Schemez, tne Bank was having 60 branches in South Kanara district. Since then it has added 29 branches in diferent oarts of the district. The deposits mobilised by the Bank in the dist- ict at the enc of December 1969 were about Es..157 millions. They nave increased to over Rs.397 millions in December 1975. The share of Syncicate 3wk in every sphere of banking activity is fairly la=ge as could be seen from Table 8. 13 "Reorct of the Lead Sank Survey :South Kanara District" by Economic research Department, Syndicate 2ank, Manipal, 1973. 14 Besides Sync.icate Bank, 13 otner public sector banks and 7 Private sector banks are ooerating in tne district. 94 TABE 8 SYmDICATE BÄIS SE.P I1, BAIKI1G ACTIvITIS IN ä0UIH KA (As. on December 1975) (Rs..Millions) åyndicate All Other District Banking Indicators Rank Banks Total Deposits 397 578 975 (40.71) (59.29) (100.00) Advances 296 327 623 (47.51) (52.49) (100.00) Credit-Deposit Ratio(Percentage) 74 56 64 Priority Sector .Advances 168 174 342 (49.12) (50.88) (100.00) Agriculture 37 50 87 (42.52) (57.48) (100.00) Small Scale Industries 37. 49 86 (43.02) (56.98) (100.00) Qther Priority Sector Advances 94 75 169 (55.62) (44.38) (100.00) Number of Branches 85 202 289 (29.61) (70.39) (100.00) Number of Rural Branches 66 124 190 (34.73) (65.27) (100.00) Nearly half of the deposit accounts in the district are with the Syncicate Bank. The total number of deposit accounts of the Bank in the district is 0.48 millions. In the case of advances, the number of borrowing accounts with the Bank is 89,691 out of the total 0.19 million borrowing accounts of all banks, its share being 47.6 per cent. The intensive banking strategy has given -he Bank a stron- base in the home district. 95 The intensive banking operations, as the financial re- sults reveal, are a viable proposition. The ultimate profits earned by the Bank in the district axe Rs .83 millions as revealed by the operational results of 1975. This figure is net of the small losses incurred by 15 rural branches. Even if liberal allowances are made for loading the admini- strative cost of head office incurred in controlling these branches, the branches must be yielding good revente to the Bank. SOME INFE=IRENCES The branch expansion strateGy is essentially a part of the business development programme. If the banks have a free choice in the selection of centres foi branch opening, they axe likely to opt for commercial and industrial towns where the business prosp-ects axe better. However, since they have to extend banking facilities to the unbanked centres in fulfilment of certain national objectives, they have to evolve an expansion strate&y which would incluie the less remunerative villages as well as the more promising centres. As there is no system of subsidising the losses of the rural branches, they have to seek the high yielding centres which can off-set the losses of te rural operations in a phased manner. "Area approach" in branch expansion, clustering of branches in a district - has been the policy of Syndicate Bank in extending its branch net work. In South Kanara and also in a number of other districts, the Bank has a cluster 96 of branches, from The district headquarters down to the sele- cted villages. The supervision of a cluster of branches has certain advantages including the reduction in the overhead costs. The agricultural credit operations could be intro- duced in-most of the districts due to the availability of a group of branches in a compact area. The farm representative could cover a wider area through the group of branches. The Lead Bank Scheme has given its blessings to branch clustering. The Bank has strengthened its branch net work in its lead districts. The rural branches of Syndicate Bank have relatively a shorter gestation period compared to other banks. This has been possiblo because of the fact that the Bank employs its retail banking techniques both.in resource mobilisation and credit disbursement. The PiAmy deposit scheme enables it to attract derosits from a wider circle of rural houseiolds. Its policy of small loans - against gold ornaments and others - is conducive to start the -loaning operations without any time lag. The growth in the volume of business adds co its profi- tability. The urban and metropolitan branches are usually selected for two reasons - for their better business prospects and for establishing the linkages in these centres to the rural net work of branches. The "retail banking" transactions are under- taken in these branches also, the emphasis varing with the local conditions. Branches in these centres break-even earlier than the rural branches and the volume of profits generated are large enough to wipe out the losses incurred by the rural and semi-urban branches. 97 The branch level financial results reveal that the break-even point is reached by them, by ana large, after the third or the fourth year, depending upon 7he volume of business they have been able to hanale. Where the credit- deposit ratios are fairly high, the chances of the branch turning the corner are brighter, after the minimum deposits exceed about Es.0.8 million to Rs.1.0 million. At lower level of deposit accretion, high credit-deposit ratio does not result in profits unless funds are obtained from else- where and invested in the rural areas, making the advances more than about Is.1.00 million. The operating costs may not be reduced as it is difficult to reduce the overhead costs which are indivisible. A workable strategy of rural banking would be of great operational significance to the less developed countries. Rural branches are of the nature of financial infrastructure in the rural area, not appealing as an immediate commercial proposition to The city-based banks. The utility of this infrastructure however cannot be under-estimated in contwi- buting to regional development. Efforts may have to be con- centrated on minimising the gestation period to convert the rural branch into a viable unit earlier. The efficacy of a rural branch in attracting customers from various walks of life depends upon a number of factors, prominent amonG which are the promotional work by the branch staff and the level of literacy as well as the average level of living conditions in the village. Other things remaining the same, there are enough evidences to show, that the initial spade work done by the branch manager and his staff would go a long way in bring- ing into the banking fold customers from all occupational g=oups in the village and its neighbourhood. 98 Deposit mobilisation in the ruralbranches is a long- drawn process. Where the average propensity to save is at a fairly lower level, it requires persuasion and determi- nation to bring them into the banking fold. Eoarding money is a traditional way of saving in some villages. The preference for this mode of saving is ,influenced by the apparent sense of security ard also perhaps the absence of any other more profitable way of investment. in traditional societies, it is not easy to dissuade these persons from continuing to hold their money in this particular form. However, where the manager has succeeded in winning their confidence he has been able to gathier a fairly large volume of savings. Additional savings could also be generated by evolvin. certain saving schemes wnich are tailored to the needs of the people even in the lower income groups. The encouragement of the use of mail transfer facilities can make a direct contribution to the increase in deposits. When an amount of money is received by an account holder - the money sent by his kith and kin serving in an urban centre - normally the tendency is not to withdraw the entire amount from the savings bank account. The receiver would withdraw once or twice in a month an amount necessary for his maintenance, leav- ing some part of the money received to accumulate in his account. This amount slowly grows as his savings over a period of time. The postal system in India is annually transferring millions of rupees from the urban areas into the rural areas and vice-versa through money orders. 'hen money is received in cash at the door step, the human tendency is to spend the entire amount. Mail transfer between two savings bank accounts being a free service compared to the relatively costlier mode of money trans- fer through the rostal channel, it should be zossible for the 99 banks to popularise this mode of- money transfer amoig its savings bank account holders. Syndicate 2ank has been able t-o build un c-myarative1 larger deposits in rural branches throug-h this process to a large extent. - 100 CHAPTER 6 OPERATING COSTS ÅTD PRGFITABILITY Banking being essentially a commercial enterprise, pro- ;Citab-ility would be one of the guiding principles of its operations. The cost-benef it analys is of any banking scheme however is beset with, innumerable procedural difficulties relating to the measurement of the benefits accruin, due to a paxticular scheme and apportioning tne total costs to its operations. The Study group on Baning Costs constituted by the Banking Commission has very rightly observed, "Banks in India have generally been working on the principle of total overall rofitability, without aetailed analysis of the relative prof itability of each of the several types of tneir various operations ". Very little efforts have been made by banks in India to assess the relative profitability of various schemes offered by them. The tendency has been to look at the overall prof itability only. In a situation where some-of the key far- tors influencing the cost of operations are governed by the monetary authorities and the state enact=ents, the banks could alter their overall profitability only in terms of their fun- ctional efficiency. In the recent years, with the rising operational costs and the. ceiling on interest rate fixed by the Reserve Bank of India, the banks are now recognising the importance of initiating cost studies. The Reserve Bank of India has also constituted a committee to go into the issues 1 Report of tne Study Group on Banking Costs, Banking Commi- ssion, Government of India, Bombay 1971, pp.211. 101 relating to banking efficiency and costs. The committee headed by a Deputy Governor of the Reserve Bank of India .2 has initiated its wor c of collecting the relevant data Known as X.E..Committee (Performance Evaluation and Pro- fitability), it is yet to submit its final report on the details of the-cost of operations. The Banking Commission has also made an attempt to assess the cost of operation of various services offered by the commercial banks in India. An inter-bank compari- son of the cost of operation of different schemes however is not feasible on the basis of these data. Even on a selective basis this cannot be done due to the non-avail- ability of comparable data. A number of banks are, for example, having daily saving schemes. similar to Pigmy Deposit Scheme. However, it is neither possible to collect the details regarding the deposits mobilised by these banks under this saving scheme nor it is possible to estimate the cost of operations of this scheme. The published annual statements relating to the financial results of the banks do not -rovide any clue to the unit cost of various services offered by the banks. As elaborate cost data are not available, what is attempted in this chapter is to provide a rough estimate of the operating costs of Syndicate Bank and compare them with the operational results. The cost of funds mobilised by tne Bank is analysed first. The costs of operations of 2 Financial Express, Bombay, dated April 6, 1976. 102 various lending proérammes are then assessed. In estimating the costs, since an apportionment of the total cost in the case of multiple products introauces an element of arbitra- riness, the exercise is confined. to one year only. Secondly, due to the non-availability of the cost data for the previcus 3 years, the analysis is limited to 1975 only3, The macro-level profitability is reviewed on the basis of fund activity. Broad comparison of tne financial ratios of Syndicate Bank is made with those of other banks. The comparison is of limited use as the disclosed profits of the banks do not correctly represent the. actual prof its generated. TEL COST U FU1DS The loanable funds of banks are regulated from time to time by the monetary authorities through the stipulated varia- tions in the statutory liquidity ratios. The rescurces of the banks comprise of deposits, borrowings from the Reserve Bank including refinance facilities and the market borrowings. Inter- bank deposits also form a small percentage of the total deposits. This type of deposit mobilisation is normallr not favourably treated specially when comparing the performances of the banks. The lender of the last resort steps up its lending rates to discipline the banks into managing Their cred.it portrolios out of their own resources. The extent to vicn the banks can rely upon the Reserve Bank of India is governed by many factors. 3 One of the limitation of the cost data pres ~nted here is, as already explained, that they are based on the operating results of only one representative branch of the 1ank. The data are therefore indicative and not conclusive. 103 Borrowing from the call money market is a temporary arrange- ment which cannot be resorted to in a large measure and it is costlier too. The deposits - £erm deposits ani tiz deposits - constitute the bulk of the funds of the banks in India.- The loanable funds are arourd 65 per cent of the total aematni and time liabilities of the iats. Besia.es tnis, s.nce this year, as a measure of controlling inflatiQn, the Reserve Bank of India has impounded 10 per cent of tne incremental aeposits. The cost of funds may not vary widely between the boanks because of certain uniformities in the cost structure. The lending rates of the Reserve Bank of India and the refinancing rate of the term lending institutions like Industrial Develop- ment Bank of India and the Agricultural Ref inance ard Develop- ment Corporation do not vary between' the Banks. The short term rates in the call money markets differ between the centres. The costs of the funds raised from the money markets vary betieen the baties depending upon the money markets in which the banks raise the funds. A.t one time the scrramble for funds resulted in the money rate shoot- ing up to 15 per cent . It has been now brouht down to 12.5 per cent, through mutual areement anong banks. The location of the decision centre in a rural setting far removed frou the f'inancial centres does not reduce the cost of market borrowings for Syndioate Bani_ compared to the cost incurred by the Bombay-based banks. Tne BanK has to depend mostly upon the Bombay money maret to ortain the call ... .. ... . 104 money. These operations are executed by the main branches of thfe Bank located in Bombay and oter meetropolitan centres which axe also imDortant money mxarets. Regarding the interest-on deposits, there are certain maximum limits prescribed by the Reserve Bank of India. The Indian Banks' Association keeps a watchful eye on the mani- pulation of the interest rates and other publicity gimmicks resorted to by banks in their efforts to attract more deposits. The rates of interest on deposits are tnerefore standardised for all the public sector banks while the smaller banks in the private sector are permitted to offer half a per cent more on their deposits. For some time, the banks in India were offering fabulous prizes to their lucky depositors on the basis of periodical draws. This practice was adopted by most of them to check the intensive propaganda made by the non-banking financial corporations which were attracting the gullible urban savers. The proposed bill on the regulation of the activities of these financial corzorations is ex)ected to ease the situation for the banks. The average cost of the funds for a bank would be determined by the interest rate offered on various types of deposits and the administrative cost attributable to fund raising. The composition of term an4 time deposits influences the cost of funas, while the rural-urban compo- sition of the branches affect the establishment cost marginally. In the recent years, there has been a per- ceptible shift in the composition of deposits from lower interest-bearing time deposits to higher interest bearing 105 term deposits for the banking industry in general'. The administrative cost also is increasing on account of the wage rise and the cost of stationery and printing. The average cost of the funds for'Syndicate Bank works out to be 8.55 per cent per annum for 1975 as explained in an earlier chapter. As ttere has been freauent changes in the d,eposit rate structure during the last few years, the cost has not been estimated for any previous year. The details of the changes in the interest rates on deposits are given in Annexure 6.1. The deposit mix of the Bank also contributes to the average cost of the funds as the higher interest bearing f ixed deposits are proportionately larger than the near-zero interest bearini current deposits. The large number of savings bank deposits ai the freauency of their operations give rise to an increase in the average cost of funds. Accora.ing to a publication of tile Indi.an 3arks' Asso- ciation, the cost of handling a d.eposit account is ;ne lowest for Syndicate Bank among the major banks in India botn in the private ard public sectors. It is estimated at 0..12 per cent for the Bank as against the highest cost of 0.28 per cent in the case of United Commercial Lank5. 4 See the latest issue of "Statistical Tables Relating to 'anks in India 1974", Reserve Bank of India, 3ombay 1977, Table 12. Maturity classification of Fixed Deposits and other Deposits with Scheduled Commercial 2anks 1969--72 and 1975 - page 24. 5 "Financial Analysis of Banks 1973-1976" by the Indian 3anksl Associat ion, Bombay, July 1977 p. vii. 106 COST C4 FI.ANCIAL INTEENDIA2ION The cost of financial intermediation is very largely influenced by the rate at which the banks can raise their funds. As the ceiling on the interest charged to the borrowers is fixed by Reserve Bank of India, the interest rates charged to various types of borrowers do not reflect the relative cost of financial intermediation. The interet rate structure is linked with the changes in the Reserve Bank' s lenling rate and the pri6rities accorded to some selected types of advances. The Differential Rate of Interest scheme for example is being implemented by lerding a' 4 per cent. The priority sector. advances are charged at a lower rate of interest compared with other types of advances. The unit cost of aavances is likely to vary among branches aepenaing upon the total turnover of the branch, its staff pattern and other factors. But the rate charged to the borrowers is not linked to the cost of operations at the branch level because of uniform rates. In the system of branch banking practised in India, inter-regional differentiation in the terms and conditions of lending schemes is aosent, though the cost differentials do exist. The computational difficulties are more in the case of the assessment of the cost of, credit disbursement for different purposes. An attempt is made to assess the cost of a few of the important credit operations. The details of the cost structure of these lending schemes worked out on the basis of a auick estimate undertaken by us are presented in Table 1. 107 TABLE 1 - OPE,?TI2G COST OF SYMDICATE BAKV S LEkING' SCE~IS Establish- Other costs Cost Total Type of lena.ing ment cost including of cost H.O. cost Fund (Percentage per annum'per outstanding amount) Agriculture 0.25 0.04 8.55 8.34 Small Scale Industries 0.32 0.02 8.55 8.89 Large Industries 0.52 0.20 8.55 9.27 Retail Trade, Small Busi- · ness, Professionals and· Self-employed 2.04 0.18 8.55 10.77 Road Transport Operators 0.13 0.07 8.55 8-75 Others 5-73 0.51 8.55 14.79 ALL ADViCE- (Average) 2.06 0.18 8.55 10.79 Note: "Others" is a miscellaneous category ,nich inclues the bills discounted and other types of banking operations and they are not strictly comparable with the general lending scher-es. The interest cost is treated as uniformly the same for all types of advances because the cost of any lending scheme is not directly *linked with the cost of funds raised through a particular type of deposits. Nor do the banks have the practice of varying the interest rate at the branch level on the basis of the cost of raising funds locally. The average cost of fund.s therefore can be taken as the same for all transactions of the Bank. 108 The cost of supply of creacit to small farmers ani -small enze.:rises compares Lavouzably with the cost of supply of credit to the big borrowers or large industrial borrowers. The advances made to retail traders and for small business are one Of the costlier schemes for the Bank. ecause of the small size of the borrowing accounts, the large volume of parer wcrk involved and other supervisory operations, the cost of these schemes to the Bank is relatively higher at 10.77 per cent. Alternatively, the cost of leriing to large urban enterprises is comaratively lower at 9.27 Per cent. The service charges are levied on the basis cf the volume of advances to industrial borrowers. is they cover uze incidental charges, the cost of operation of the larger advances is not unduly large. The rate of return on lwrer advances are la~ enounh to off set the lower returns ob- tained on the smaller advances. The interest rate structure has been chaninI dur ing the last fixe years, varying the relationshix betreen the cost and revenue of different schemes. The details of the recent changes in the interest structure of the Bank are given in Annexure 6.2. The cost of handlinga borro;inG account is estLmated to be the lowest ior Synd icate Bank accordin- to the study of the Indian Banks' Association mentioned earlier". The cost is 0.71 Per cent for Syndicate Bank ;hile th highest is 4 per cent. The cost of financial internediation cannct be perhans measured in isolation for a multi-prcduct enterprise like a banking company. Just as the banks raise fund s at varyin- 6 Indian Banks 4.ssociation Op.cit. p.vii. 109 rates of interest, they lend at different rates of interest for different puzposes. The rate of return on a particular lending scheme may be much lower and nay be even unrerr.unera- tfive, if considered in isolati on. Eowever, f=, obvious reasons, the banks have to undertake such lending schees to be in tune vith the overall set of triorities deternined by the =onetary authorities. The banks can make adecuate compensation i or such advances by having a årider =argin in their advances to the larger borrowers. To 5ive an illustra- tion, the total of priority sector advances cf Syndicate Bank are of the order of Rs.1700 millions, where the rate of interest cnared is lo-,er than that charged for eneral advances. The rates of interest charzed for prioriýt sectcr advances var from 12 per cent to 15 per cent as aga:nst the general advances fro 15 tc 16.5 per cent. ain, ztere is a rate differential between the small borrowers and the b4= borrowers. The rate of interest varies from 14 per cent for borrowins upto Es.5000 to 15 per cent for borrowings from Rs.5CC0 to Es.10,9C0 ar-d it is 15.5 per cent for the borrow- ings above Rs.10,000. The total deposits mobilised by the Bank under currenz deposits are of the order of 3s.782 millions and the deposits mobilised under Pig=y DepoEit Schene are to the tune of Rs .597 millions. very large pe-centage of the advan- ces made to the priority sectors may be deemed as robilised at a fairly lower rate of interest. In an excellent econometric analysis of banking costs undertaken by Dr.L.M.Khusro for the Banking Conmission, it is reported, "The result for Syndicate Fank suggested that demand deposits affect advances of Syndicate Eank uch more strongly than Uie denosits36. 6 Dr..-.L-a-husro and i.b.Siddarthan - "Z .conometric Icdel of Eanking in Incia" in Technical Studies prepared for the Eanking Commission, Vol.I, Ieserve Bank of Incia, Eoabay 1972 - pp.59 110 Secondly, thou,h the Bank has a large nu=ber cf small borro7,ers who are borrowin at relatively ao-uer rate cf. nterest, the bulk of the advances of the lank is lent at fairly high interest rates. This could be seen from Table 2 in which the data relating to the volume of advances made at d.u erent interest rates are furnished. TA3LE 2 Amount lent Dercentaåe share Tnterest ÅLanEe Rs.Millions) in the total -redit Uoto b per cent 144.8 4.75 6 to 9 per cent 31.7 1.04 9 to 10 per cent 29.0 0.95 10 to 11 per cent 99-8 3.27 11 to 12 per cent . 369.9 12.1 12 to 13 per cent 151.6 4.97 13 to 14 Per cent 238.4 7.82 14 to 15 Per cent 247-5 8.11 15 to 16 per cent 365.0 11.97 16 to 17 Der cent 182.2 5.97 17 to 18 per cent 950.4 31.16 Above 18 per cent 239.7 7.86 010 5030.o* 300.0o *'J.'ota1 Credit exoluaes the inlano and foreien bills pur- crased and discounted or advanced a;ainst. It could be seen from the table that 39 per cent cf the Bank's advances are made at 17 per ce:-t and above and anotår 111 25 per cent of the advances are made at the interest range of 14 to 17 per cent. The interest revenue of the Bank is not likely therefore to be affected by the lower rate of interest charged on the small borrowings. AGGREGATE PEOFITA3ILITY The corporate image of a multi-product industry is represented by the overall prof itability rates as publi- shed in its annual reports. The fund activity which generates profit for the Bank could be analysed in terms of the margin between the total interest paid by the Bank on its deposits and borrowings and the interest received on the advances an the commission earned on bills dis- counted. As the growinge cost of administration of the Bank has to be met by the margin between the two, the net pro- f itability of the Bank would depend upon tnis margin. The establishment expenditure expressed as a perceritage of the net interest income (interest eaxnea. less interest paid, plus exchange and commission earned.) is a good in- dicator of the operational results of the Bank. The details relating to the interest-cost anf interevt-revenue of the Bank for the last few years are presented in Table 3 The revision in the interest rates consequent to the raising of the bank rate thrice during the last 15 years has caused the upward revision in the interest cost as well as the interest revenue. The spread between the interest cost and revenue has slightly increased from 7.75 per cent to 8.31 per cent during this period. 112 THE SPRED BETV:EN ITEREST COST iM DT TEREST 17PWT - - ---~-- (Percentage) Interest Interest Spread Establishment Eoenditure Year Cost Revenue Net Interest income 1960 2.78 10.53 7.75 85.11 1965 2.77 10.63 7.86 93.41 1970 3.67 10.58 6.91 98.12 1975 7.25 15.54 8.31 98.73 There has been a substantial intrease in the other operat- ing expendituxe at the same time.- They have gron from Rs.5.62 millions in 1960 to Rs.2170.18 millions in 1975. The establishment cost - net interest income percentage has increased from 85.11 in 1960 to 98.73 in 1975. The establishment cost therefore has escalated rapidly during the last decade . Some of the details of the operating costs are given in Annexure 6 .3 Apart from raising deposits and extending credit, the banks perform many other useful banking services, a few of which are off ered free of charge vhile a few others are charged. Re--ittarces and collections for certain sections of the clients, issue of rupee trave- llers' cheques and clearin. of cheqæs are some of the free 113 services-. These services cos tc the banks in terms of book- keeping and postare exenses. Thougn precise estimates of the costs of these services for Indiarn banks are nct readily availabLe in official publications, tce P-.-i-Committee as opined that tnese servIces are beczming costlier to the tanks. it is feered tna: in most of th cases these serices are rendered by te banks at a loss of revenue. These exenses are being met obviously out of the interest income earned. Two of the ouertional features of the bankn in Tndaa which have an impact on their overall profitability are the "service charges" and the "penal rate of interest". The service charges collected by the banks on their bcrrowing accounts largely represent the costs incurred by them for appraisal and managerment of the loans. The nomenclature s used for this levy on the borrowers vary among the banks as "processin4 charges", "appraisal charges" and "incidental charges". The practice adopted by the banks also differ in est ting the service charges. The processing fee thus has a hidden interest elem:ent in it in additicn to the actual interest rate charged. The Committee on enal Rates and Serzice Charges appointed by the Reserve lank of India has suggested the abolition of the service charges from January 1978 and replacing the same by a flat rate of 1/20th of one mer cent subject to a ma:::-un of Es.2500 on 7 a once f or all basis . The penal rate of interest is charge< by the Lanks vhen there are irregularities in the repayne t of loans and the d ef aults in borroing covenants. Sormne of the banks 7 press Release of the re-rerve Cank of Incia, .ated November 17, 1976, 2ombay, .... ... .......... 114 have been charging a penal rate of ~21 per cent on the se defaulting accounts. This practice is likely to improve the prof it position of the- banks artificially. Theref ore, the Comnittee on Penal Rates and Sergice Cnarges h-as re- commended that the penal rates should not be more than 1 to 2.5 per cent above.the nornåal rates applicable to such advances. The. likely impact of these. two measures on the prof itability of the banks cannot be assessed for want of d.ata. PROF ITAILITY COMPAED Profitability is not necessarily the main criteria in guicing the activities of the public sector banks in India. In the present context of banking development in the country, they have been directed to venture into new f ields and activities which cannot be normally undertaken purely on the basis of commercial considerations. In a variety of manners, the public sector banks have been asked to participate in the lenaing programmes for the development of infrastructure facilities in various parts of the country . These banks have theref ore becgme unortho- dox both in their,policies and lending programmes. The Government of India .ino is the owner of these banks, it appears, is also not judging the efficiency of a bank merely in terms of the amount of profit transferred to the central government under section 10(7) of the Banking Companies (Acq.uisition and Transfer of Undertakings) Act 1970. An inter-bank comparison of the profitability among the public sector banks thus loses much of its significance. At the same time, since all of 115 them are now adopting programrnes and policies which have broad uniformity, an inter-bank comparison of the profits can be attemted. The profitability ratios are worked out for all the nationalised banks on the basis of annual balance sheet figLures available for 1975. For the sake of sirplicity of comparison, only 3 ratios ar. considered. The dividend ratio - ratio of the amount transferred to the Government oE' India out of the pror:its earned to the investment made by the government in the acquisition of the bankinE com- pany is the fi-rst ratio. The second -ratio considered is the r.in ratio in whicn the net profit is ex,ressed as a percentage of the total income. The tird ratio selected is the profitability ratio whici is the ratio of net profit uo the working funds. The ratios compiled f or the 14 nationalised banks are presented in table 4. On the basis of the dividend ratio, Syndicate Bank ranks fifth'amon= the public sector banks. In terms of the profitability ratio it ranks ninth. As against the average profitability ratio of 0.2390 for the nationalised banks, the profitability ratio of Syndicate Bank is 0.2446. This is higher than the rat io of some of the larger banks, Some of the other banks, smaller than Syndicate Bank have en the other hard better profitability ratios. The prof itability ratio is influenced by a number of factors like the deposit mix, the structure of rural and urban branches composition ani the staff ing pattern of these branches. • Each of the nationalised bank has it s~ own 116 PFRW ITABILITY 1iATIOS C1 NATIONALISED B Dividend Margin Prof itabi- Name of theBankRatio Ratio lity Ratio Ind-ian Bank - 8.863 3.761 0.3049 Canara Bank 7.027 2.840 0.2516 Bank of arcda 6.805 3.137 0.2617 Union Bank of Ind.ia 6.604 2.745 0.2322 Syndicate Bank 6.590 2.860 0.2446 Indian Overseas Bank 6.500 5.067 0.4445 Bank of India 6.132 2.992 0.2523 United Commeroial Bank 6 .081 3.364 0.2994 Punjab National Bank 5.619 3.704 0.3066 Allahabad Bank 2.500 2.721 0.2586 Central Bank of India 2.261 .1.065 0.0992 United Bank of India 1.911 2..538 0.2131 Dena Bank 1.409 1.580 0.1513 Bank of Maharashtra 1.304 1.567 0.0571 NATIONAL-SED BålKS 4.972 2.853 0.2390 - Average ) Dividend Ratio = Ratio of Ret-z,n to Government and the investment of the Government of India Margin Ratio Ratio of Net Prof it to Total Incoe Prof itability Ratio Rat io of Net Prof it t o Working Pund s. combination of these factors. Their combined impact on profitability therefore var from bank to bakr. Those 117 who are familiar with the presentation of the balance sheets and annual reports of banks in India would agree that on the basis of tbe "oublished profitability fi6urel" it may not be possible to deduce the ooerational efficiency of a bankr for a comparative analysis. The balance sheets do not give the details of the déposit mix exceut giving tvro or three maajor heads. They again ao not disclose the sta.fin6 pattern of the branches of these banks. The pattern of branch distri- bution is given, but the staffing pattern oi tne branches is not indicated anywhere. Without having these detailed brea-- ups it would be rather impossible to make a fairly reliable estimate of the profitability of banks. Secondly, it is also an accepted practice among the banks in India to publish the income figures "af ter makinE the necessary provisions"l. The provisions made for the irregular advances is a guarded secret among the banks ard one does not know what proportion of the gross income this constitutes. As explained earlier, too much emphasis need not be attached to the Drofitability ratio of the public sector banks. In a study of the profitability of nationaliced banks it has been observed that though Syndicate _ank has the largest percentage of its advances to the priority sectors, its average profitability is above the average for all the .8 nationalised banks . The lenaing programmes of the Bank be ins in the n,ture of retail banking and also innovative 8 Prof.S.Singh, "Prof itability of Nationalised Banks", 1 and 2 - in Financial Express aated January 4 and 5, 1977 Bombay. 118 in some spheres, the finaicial results do not appear to be unduly depressed. SOE INIFhEuNCES The analysis of the operational results of the Bank based on the ruaimentary data as presented above provide some inferential evidences, about the usefulness of the innovations introduced by the Bank. Gaining new markets where competition was not very tough was one o the goals aimed at by the Bank. This was achieved by offerin, a new proauct ox service which haa no close rival and which cost relatively less. This made the whole exercise financially viable albiet its novelty. The Pi=my deposit was one such experiment which could raise a good volume of deposits at a cost favourably comparable with the cost of funds raised through the usual channels. The operating costs of different types of deposits including Pigmy has been increasing in the recent years. But a narrow margin appears to be still pre- vailing in the Piony's cost-revenue nexus, making it worth- while for the Bank to continue this scheme. The advances to retail traders, professionals and self- employed persons cost to the Bank slightly more than the advances made to agriculturists and small scale industries. The large industrial advances have a wider margin than the small advances. The small advances are therefore partly sub- sidised out of the revenue earned from the larger advances. The overall profitability is not reduced by such an account- ing procedure. Some of the activities have to be inevitably subsidised in any multi-product enterprise. 119 The compatibility of the Bank's profitability ratio with that of othier nationalised bans may oe construed as -ne aGTainment of a fair degree of operational. effi- ciency. It is' difficult to äeneralise as to what exactly has been the impact of its innovations on tne profi- tabiliTy. When the Bank was in the private sector, the innovations would not have been pursued continuously had they failed to yield results either in reducing the cost in certain cases or in increasing the volu,e of business in other cases. The lesson from Syndicate Bank's experience specially for the less developed countries is that banking innovations would be an effective instrument of development only if it could keep under check the cost of derations and cater to a larger section of the society. The small savings schemes, the small advances and lending to agriculture an other enterprises need not necessarily be a drain on the prcfits of the bank. They can provide sustenance to a growing bank in its early stages. Syndicate Bank's exneriments have certain ingredients which would be of some interest to the banking industry in the less developed countries. However, the economic and banking background against which these innovations have been formulated and implemented may differ widely between the countries. The utility of tne Synicate 's e=periences therefore has to be assessed in its proper perspective and modified in the context in which they are expected to be used. 120 - AJNCURE 1.1 THE GRCWTH OF SYDICATE BANE : A STATISTICAL FROFILE (Rs.000s) Year Paid-.P . Loans & Invest- Profit/ Dividend Branches (Dec.) Capital R.dvances ments Loss (Percent) (Number) 1926 8 6 11 - 1 6 1 1927 10 - 16 15 - 1 6½ 1 1928 12 1 29 28 - 1 6 2 1929 14 1 66 66 7 2 7 3 1930 20 6 189 208 - 2 10 3 1931 20 6 433 444 3 7 15 5 1932 20 10 820 709 134 13 15 6 1933 40 20 1069 993 227 23 15 9 1934 130 34 1144 1127 203 21 15 15 1935 215 46 1413 1410 324 21 15 16 1936 220 52 2150 1882 1204 27 15 27 1937 368 210 2863 3022 1191 33 12 31 1938 379 200 2487 2784 1017 49 15 32 1939 460 206 2449 2414 1393 38 12 32 1940 521 202 2314 2144 733 49 12% 32 1941 610 210 33å2 2670 1558 50 15 39 1942 725 202 5892 3662 2107 61 15 44 1943 1566 352 11164 4822 4741 136 20 47 1944 1923 375 14035 6623 6034 158 15 48 1945 1939 491 23533 10639 11586 218 15 53 1946 2168 708 27812 15486 14797 383 15 73 1947 2215 736 33320 18934 16057 403 15 78 194$ 2269 776 34145 19404 14790 415 121 78 1949 2281 1000 33910 15100 14896 408 12 79 1950 2356 900 36899 18363 13334 421 9 79 1951 2438 1000 36171 25253 12869 401 9 79 1952 2511 1100 40107 24271 13069 352 9 84 1953 2534 1210 47151 30817 14859 401 9 92 1954 2552 1350 54237 31680 20886 521 9 92 1955 2676 1500 66703 39378 30771 596 12 . 93 Ccntd. 121 THE GRGWE OF SMKDICATE BANK : A STATISTICAL PROFILE (contd.) (RS.000ts) Year laid-up . Loans & Invest- Profit/ Dividend Branches (Dec.) Capital osits Advances ments Loss (Percent)(NutmberY 1956 2781 1800 84618 51192 34255 895 15 96 1957 2847 2200 103107 63441 38419 1062 15 104 1958 2896 2650 131130 80063 60972 1022 15 115 1959 4702 3500 170882. 108952 73506 2002 20 129 1960 4721 4250 188689 122361 61694 2523 20 139 1961 4807 5350 246320 154532 89417 3210 20 155 1962 7665 6600 326537 182742 120353 3033 20 173 1963 8058 7525 454917 278293 164707 3991 20 189 1964 9358 8500 514538 334803 182166 4849 20 203 1965 9973 10000 591112 372538 189430 3100 20 204 1966 10055 13385 740252 479116 261337 3294 20 217 1967 12284 14491 801523 464301 302719 2526 20 218 1968 13633 15776 1121926 706098 311331 3125 20 254 1969* 14197 15554 1447222 1049242 456795 2889 - 355 1970 14197 16979 1677470 1228223 462700 3560 - 461 1971 14197 19383 2196389 1501623 613857 4698 - 507 1972 14197 21784 2711426 1790991 769971 4704 - 564 1973 14197 24225 3437799 2304080 1099151 4715 - 638 1974 14197 28548 4260639 2813705 1276817 6653 - 711 1975 14197 36100 5365969 3810921 1513596 6872 - 778 1976 14197 45000 6908224 5006285 2028188 11286 851 * Nationalised on July 19, 1969. 122 ANNEX=E 2.1 SB= R OF PIGMT DEPOSITS IN TOTAL DEPCSITS Share of Tear Total Deposits Pigmy Deposits Pgry Deposits (Dec.) (Rs ,Millions) (Rs .Milli ons) (Percentage) - - 1946 27.8 4.0 14-4 1947 33.3 5.0 15.0 1948 34.1 6.2 18.2 1949 33.9 6.6 19.5 1950 36.9 6.9 18.7 1951 36.2 8.6 23.8 1952 40.1 9.9 24.5 1953 47.2 10.8 22.9 1954 54.2 11.5 21.2 1955 66.7 15.5 23-2 1956 84.6 19.8 23.4 1957 103.1 21.2 20.6 1958 131.1 26.2 19.9 1959 170.9 32.1 18.8 1960 188.7 39.1 20.7 1961 246.3 42.8 17.4 1962 326.5 47.2 14.5 1963 454.9 56.5 12.4 1964 514.5 71.6 13.9 1965 591.1 93.6 15.8 1966 740.2 100.4 13.6 1967 801.5 110.2 13.8 1968 1121.9 122.6 10.9 1969 1447.2 137.1 9.5 1970 1677.5 154.3 9.2 1971 2196.4 193.0 8.8 1972 2711.4 240.7 8.8 1973 3473.8 295.0 8.6 1974 4260.6 336.6 7.9 1975 5366.0 397.3 7.4 1276 6908.2 476.9 7.2 123 iXL 2 .2 GROVj IN D-NFE £2W2 CATEGOIES CF DEPCSITS (Rs .Millions ) Yeax Savings Curent 6Pigmy Fixed Total 1946 4.0 27.8 1947 5.0 33.3 1948 6.2 34.1 1949 6.1 9.1 6.6 12.1 33.9 1950 7-0 7•0 6.9 16.0 36.9 1951 7.6 6.5 8.6 13.5 36.2 1952 8.5 6.1 9.9 15.6 40.1 1953 10.3 7.6 10.8 16.5 47.2 1954 12.3 7.2 11.5 25.2 54.2 1955 15.0 9.0 15.5 27.2 66.7 1956 18.6 11.4 19.8 54.8 84.6 1957 19.2 12. 2 21.2 50.5 103.1 1958 25.7 16.0 26.2 65.2 131.1 1959 29.1 19.1 32.1 90.6 170.9 1960 35.7 20.3 39-1 93.6 188.7 1961 42.7 25.6 42.8 135.2 246.3 1962 53.3 35.0 47.2 191.0 326.5 1963 78.3 71.3 56.5 248.8 454.9 1964 101.4 80.7 71.6 260.8 514-5 1965 124.3 104.0 93.6 269.2 591.1 1966 165.1 114.8 100-4 359.9 740.2 1967 196.8 112.7' 110.2 381.8 801.5 1968 240.3 185.0 122.6 574.0 1121.9 1969 296.9 238.4 137.1 774.8 1447.2 1970 396.1 258-7 154.3 868.4 1677.5 1971 498.2 322.9 193.0 1182.3 21969,4 1972 648.1 431.3 240.7 1391.3 2711.4 1973 847.0 535.9 295.0 1759.9 3437.8 1974 1080.2 733.5 336.6 2110.3 4260.6. 1975 1322.4 892.1 397.3 2754.2 5366 .0 - 1976 1855.1 1108.7 476.9 3198.4 6639.1 Notes 1. The Break-ups for 1946 to 1948 wre not available. 2. The current deposits include contingency accounts. 3. The FLxed deposits include the cumulative deposits. 124 NEURB 2.3. GROWH OF PIGM DEPCrrI-N DIPF T2 A OF BRAMNWCI (Rs.000-ls) Year Branch Classification, Branches (Dec.) Riral Semi-urban Urban metropolitan Total (Number) 1946 305 1394, 1366 952 4017 73 1947 384 1740 1704 1188 5016 78 1948 653 2131 1974 1448 6206 78 1949 566 2366 2505 1172 6609 79 1950 510 2869 2447 1107 6933 79 1951 569 3378 3433 1225 8605 79 1952 639 4404 3713 1186 9942 84 1953 643 4405 4354 1350 10752 92 1954 688 4688 4642 1444 11462 92 1955 1142 6129 6116 2119 15506 93 1956 1399 7256 8449 2701 19805 96 1957 1327 8531 7986 3338 21182 104 1958 1645 10465 9744 4376 26230 115 1959 1895 13192 10993 6016 32096 129 1960 1961 14519 12957 9678 39115 139 1961 2138 15864 14154 10604 42760 155 1962 2358 17498 15612 11697 47165 173 1963 3621 20128 24660 8056 56465 189 1964 5085 21269 29721 15541 71616 203 1965 7360 32102 30976 23136 93574 204 1966 7120 29792 41718 21787 100417 217 1967 7115 29761 41586 21745 110207 218 1968 8701 36399 5086t 26595 122556 254 1969 9732 40711 56885 29745 137073 355 1970 14198 50156 45681 44292 154327 461 1971 24892 50749 59240 58082 192963 507 1972 30973 63046 73711 72270 240100 564 1973 36285 89975 82010 86730 295000 638 1974 41402 102663 93575 98960 336600 711 1975 49050 121150 110420 116680 397300 778 1976 69269 120241 143903 144487 476900 851 =~~ ~ ~~~. . .. ... .. .- ==== - 125 L~3 -1 ANE!URE 3.1 AGRICULTUR.L ADVANCES AD DELINQUENCY RATIOS (DIrect Finance) Rs.Millions ) Year Outbstann Delinguaey 1e Demand Collection Overdues . (Deember) Advances Rat.o ()(2) (3) (4) (4/2) - 1965 36,,90 12.04 10.00 2.04 16.9 1966 45.60 15.82 12.80 3.02 19.1 1967 49.90 14.64 10.62 4,02 20.5 1968 66.40 25.06 20.02 5.04 20.1 1969 76.80 28.62 22.97 5.65 19.7 1970 113.90 44.10 33.97 10.13 22.9 1971 136.00 56.30 45.08 11.22 19.9 1972 150-10 77-39 60.68 16.71 21.5 1973 152.76 90.92 68.86 22.06 25.0 1974 205.46 115.13 76.75 38.38 33.0 1975 269.43 114.89 99.18 45.71 32.0 1976 396.90 201.00 143.80 57. 28.5 126 ANNE=UR 4.-1 SYNDICATE BAIIK'S SI'LUL ADVANCES COVER-E UNDER CREDIT GUAR7EE CCEPORATION (Rs .Milli ons) Category of loans 1971 1972 1973 1974 1975 1976 Transport A A 48.66 64.80 95.64 117.69 195.16 239.87 Operat ors B 9.11 12.77 30.97 35-50 50.20 78.14 Traders in goods other A 80,81 91.79 119.21 132.48 174.45 231.05 tban, fertiliser § mineral ol B 10.04 -5.19 46.48 49.58 39.86 95.32 Traders in fer- tiliser and A 0.34 1.27 2.48 3.98 24.54 17.59 mineral oils B B 0.28 0.38 1005 2.32 17-18 5.30 Professionals A 21.00 24.98 32.28 47.71 63.42 96.46 and self- employed B 6.16 9.20 27.10 31.41 40.18 62.16 Business enter- A 12.92 16.92 22.38 29.53 48.49 63.94 prises B 4.21 5.47 13.33 13.52 25.95 42.04 Farers A 197•63 250.47 333.32 395.29 502.42 676.15 3 34.94 50.21 132-30 150.69 207.64 340.03 Residual cae-- - - 12.00 14.50 24.40 gory of' borrowers B - - 0.41 2.27 6.38 A 361.36 450.23 609.31 739.08 1022.98 1349.46 T WTAL B 65-74 93.22 251.23 283.43 383.28 629.37 A = Total outstanding advances. B = Advances covered by Credit Guaran-tee Corporation. 127 AÆNWCTR~E Lt.2. CCUPA.TIEL CLASSIFICATIGN OP SKALL BORR0RS (As on June 1977) Accounts Amount Percentage Occupa--ion, share of credit (Number) (Ps.000's) outstanding 1.0 Direot Finance to agricul- 197593 212489 23 ture (excluding plantations) 1.1 Short-term (including 165523 167167 18 crop loans) 1.2 Medi=/long term 32270 45322 5 2.0 Allied Activities 25939 32167 4 2.1 Short-ter 18630 19957 2 2.2 Medium/long term 7309 12210 2 3.0 Plantations 1123 2388 (..) 4.0 Indirect Finance to Agri- 25051 23437 3 culture 4.1 Distribution of fertili- sers, pesticides and seeds 1757 1623 4.2 Distribution of agricultural implements and macinery 948 2762 (..) (including financing, hire purchase arrangements) 4.3 Other types of indirect 22546 19052 2 finarce 5.0 Small 3cale Industzy 8310 29546 3 6.0 Retail Trade other than 6 those included under (4.0) 5554 116717 13 7.0 Transport 8168 24945 3 7.1 Cycle rickshaws and animal 2278 2260 drawn carts Contd. c r-a 128 Percentage share ~cu.patioii Acconts Amnount o rci Occupation (Number) (R3.000's) of credit outstanding 7.2 Taxies, auto-rickshaws and 4326 17132 2 scooters 7.3 Other land transport (lorr, 763 3541 (..) bus etc.) 7.4 Other transport 801 2012 (..) 8.0 Personal and professional .. services 8.1 Educatian 3594 5126 8.2 Irofessional services (doctors, lawyers, accountants, eng- 9951 16651 2 neers, architects etc.) 8.3 Repair works 717 1114 (..) 8.4 Artisans and craftsmen 6966 6732 1 8.5 Custom service units other than agricultural custom 400 411 (..) service units 8.6 Hotels and restaurants 3934 7269 1 8.7 Other services 13021 18072 2 9.0 Miscellaneous 285527 235411 26 9.1 Purchase of consumer durables 7969 10789 1 9.2 Other personal loans 205425 188746 21 9.3 Rural industries projects 1221 1457 (..) 9•4 Differential Interest Rate 70912 54419 4 Scheme 10.0 All Others 198657 182340 19 T(PAL 854485 914815 100 )Negligible. Note: The Small Borrowers are in the borrowing group of less than Rs.,10,000. 129 ANNEKURE 5. 1 PROFITABILITY OF BECEES : 1971 Age of the Ru-ral Semi-urban Urban Metrooolitan Total Branch -__-_ - - ra ) Profit Loss Profit Loss Profit Loss -Rofit LLossoss (In years) 1. Number of Branches Earning Profits/Incurrin Losses Below 11 26 1 8 - 5 - 6 2 45 1 - 2 8 46 2 23 - 6 3 16 13 91 2-5 8 48 18 15 10 3 20 13 56 79 5-10 5 3 26 3 9 1 10 6 50 13 10 -15 10 3 13 9 10 1 13 1 46 14 Ab ove 15 12 10 42 6 19 - 9 - 82 16 All Branches 44 136 102 64 48 16 55 42 249 258 2. Profits Earned and Losses Ineurred (Rs.000's) Below 1 8 19 19 13 - 22 - 49 13 22 1 - 2 10 16 30 18 - 49 31 29 18 21 2 - 5 12 10 54 13 39 8 74 32 52 14 5 - 10 37 6 76 12 150 24 489 39 168 24 -10 - 15 34 8 64 13 271 11 126 17 120 12 Above 15 25 10 61 15 206 - 815 - 172 12 All Branches 23 14 63 15 174 29 281 34 125 18 130 Aå.NNEURE 5.2» WORKING REULTS OF A RUEAL BRANCH (Rs. 000s) Indicators 1970 1971 1972 1973 1974 1975 1.0 Deposits 164 570 841 1218 1624 1371 1.1 Tem Deposits 70 290 459 580 947 915 1.2 Time Deposits 94 280 382 638 597 456 2.0 Avances 66 266 599 984 1171 1577 2.1 Priority Advances 27 86 349 520 631 810 2.2 Other Advances 39 180 250 464 540 767 3.0 Inccme Earned 3 11 29 86 133 217 3.1 Interest Income 2 9 25 73. 117 206 3.2 Commissicn 1 2 4 6 16 11 4.0 Expenditure 16 22 33 91 143 177 4.1 Establishment cost 10 10 13 41 59 71 4.2 Interest Cost 2 8 15 40 69 91 4.3 Other costs 4 4 5 10 15 15 5.0 Net rofit/Loss -12 -10 - 3 - 5 - 9 -39 6.0 Ultimate Profit/ -10 - 3 8 25 53 Ultimate Loss 7.0 Staff Employed 3 3 4 6 7 7 = Numb er) 131 ANECURE 601 THE CATGE IN THE DEPOSIT-PATES STRUCTURE (Per cent per annum) From Fr cm Fr cm Frcm Fr cm F,r cm P o D1.9.69 1.4.70 11-1-71 1-4.75 1.4.74 25.7.74 15 to 45 days 1 425 1.25 2 2.75 3 3 46 to 90 days 2.5 2.5 3 3.25 3.5 5-5 91 days to 6 months 4 4 4.25 4-75 5 5.5 6 to 9 months 4.5 4-5 4.75 5.25 5.5 6 9 months to 1 year 5 5 5.25 5.25 6.25 7 1 year 5.5 5.5 6 6 6.75 8 2 years 5.75 6 6.5 7 7.5 8 3 years 6 6 6.5 7 7.5 9 37 montbs 6 6.5 7 7 7-75 9 4 years 6 6.5 7 7 7.75 9 5 years 6.5 6.5 7 7 7.75 9 61 months 6.5 6-75 7.25 7.25 8 10 .. ... .- -- -- 132 ANNÉXURE 6.2 EITE T RATE STRUCTURE OF ADVANCES (Per cen:t per annum) Prior -bo 21-7-74 Af ter 23-7-74- TpofAdvp-noes -. 5Z Z4 fe 277 Type Olean Secured Clean Secured 1. Agricultural Advances 1.1 Food crops Upto Rs.5000 11•0 - 12.0 12.0 Rs.5000 - Rs.10000 11.0 13.0 12.5 Rs.10000 - Rs.50000 12.0 - 14.0 13.5 Above Rs.50000 13.5 15.5 15.0 1.2 Ncn-food crops Upto Rs.5000 11.0 12.0 12.0 Rs.5000 - Rs.10000 11.5 - 13.5 13.0 Rs.10000 - Rs.50000 12.0 - 14.5 14.0 Above RIs.50000 13.5 16.0 15.5 1.3 For Medium/Long ter- Upto Rs.50000 13.5 13.0 16.0 15.5 Above Rs.50000 15.0 14.0 17.0 16.0 2. Advances to Small Scale Industrial Units Upto Rs.5000 11.5 1100 13.0 12.5 3 Rs.5000 - Rs.10000 12.0 11.5 13.5 13.0 Rs.10000 - Rs.0.10 million 12.5 12.0 14.0 13.5 Rs.0.10 - Rs.0.20 millions 13.0 12.5 15.0 14,0 Above Rs.0.20 millions 14.5 13,5 17.0 16.0 3.• Self-Enployment Scheme 3.1 Under Credit Guarartee Corporation Upto Rs.50000 11.5 11.5 13.0 13.0 Rs.50000 - .0.10 million 12.5 12.0 14.5 14.0 Contd. 133 (Per cent uer annin) Prior to 23-7-7A' After 23-7-7. Tyrpe of Adva-nces Clean. Secu--ed Clean Secured 3.2 Under Credit Guzrantee Cranisation Upto Rs.0.20 mill ians 11.0 11.0 13.0 13.0 Above Rs.0.20 millions 12.0 12.5 14.5 14.0 4. All !dvances to Transport Indust=y (Other thai Self-Employment Sche-me) UPto Rs.5000 13.0 15.0 14.5 14.5 Ps.5000 - Rs.10000 13-5 13-5 15-0 15.0 Above Rs.10000 15.0 15.0 17.0 17.0 5, Other Priority Sector Advances 5.1 Covered under Cedit Guaantee Corporaticn Upto Rs.5000 13.5 12.5 15.0 14.0 Rs-5000 -Es-10000 14-0 13.0 15.5 14.5 Above R3.10000 14.5 13.5 16.5 15.5 5.2 Not covered Iby Credit Guaran-tee corporation Utto Rs.5000 14-0 13-0 15.5 14.5 RS,5000 - Rs.10000 14.5 13.5 16.0 15.0 Above Rs.10000 15.0 14.0 17.0 16.0 6. Advances against. Govt - 13.25 - 150 Securities 7. D.R.I. Scheme 4.0 4.0 4.0 4.0 8. Educatien Lcans ) 8:1 For studies abroad 11.5 - 13.5 - 8.2 Far higher stud-ies in India 12.0 - 14.0 - 9. General rate 15.0 14.5 18.0 17.5 134 ANNI&URE 6. 3 SYNDICATE BAI : MMATING CCSTS D RåTICS 1950 1955 1960 1965 1970 1973- Total Operatir Inccme 2.38 3.85 13.59 41.20 135.21 529.80 Interest Eaxned on Advances 1-53 3.29 12.14 36.88 118.93 494.38 Interest Paid on Deposits 0.61 1.31 5.24 17.10 64.07 309.90 Establishment Ccst 0.84 1.35 3.99 14.49 46.95 162.27 Total Operating 0cst 1.96 3.26 10.86 38.10 131.65 527.08 (2) Cost Ratios (Percentage) Interest Paid/Total Deposits 0.02 0.02 0.03 0.03 0.04 0.06 Interest Received/Total O.CS 0.08 0.10 0.10 0.10 0.13 Advances Interest Paid/Total Opera- 31.12 40.18 48.25 44,88 48.67 58.80 ting cost Establishment Cost/Total 42.86 41.41 36.74 38.03 35.66 30.79 * Operating Ost Profit/Operating Cost 21.43 18.40 23.20 8.14 4.95 2.94 =~ ~ ~~~4 18-4 23.20 ~~= = = = -