Innovations in banking : the Indian experience impact on deposits and credit

DOMESTIC FINANCE STUDIES NO. 63 INNOVATIONS IN BANKING: THE INDIAN EXPERIENCE IIPACT ON DEPOSITS AND CREDIT By C. Rangarajan The views presented in this paper are solely those of the author and do not necessarily reflect the official opinions of the World Bank or its affiliates. June 1980 Public and Private Finance Division Development Economics Department Development Policy Staff TABLE OF CONTENTS Page INTRODUCTION CHAPTER 1 DEPOSIT MOBILISATION 1 CHAPTER 2 IMPACT ON CREDIT 109 CHAPTER 3 CREDIT GUARANTEES 175 CHAPTER 4 NEW APPROACHES TO LENDING 212 CHAPTER 5 SUMMING UP 251 Introduction The level and particularly the structure of saving and invest- ment are shaped to a considerable extent by the nature of the financial system. In the LDCs, the major problem in this area is that of adapting the existing financial structure to the requirements of the development process. The major part of the financial system is the commercial banking system andhence it was but appropriate that one of the major research pro- jects of the Division should relate to the Behaviour of Commercial Banks and the extent to which it is modified by selective policy intervention. The country studies relating to Brazil and Sri Lanka have been brought out in Domestic Finance Studies Nos. 39 and 41 respectively. This paper relates to India. The inferences that one can draw on the basis of the Brazil study are the following: (i) Banks cease to be innovative in an inflationary environment and function more or less as agents of the government for the provision of credit to the sectors specified by the government agencies; (ii) Their role in resource mobilisation is limited and a greater part of their resources is provided by the government in a variety of ways; and (iii) Even in this context, credit allocation patterns of the banks seem to have been the function of the nature of their expertise, specialization and philosophy underlying their evolution; they have preferred, even in the specific areas, large borrowers to small-medium ones and have not succeeded in reducing transaction costs through financial innovations so as to make their credit instruments accessible to small borrowers. Sri Lanka's case illustrates bank behaviour in a number of LDCs. Banks' resources were adequate to undertake new functions but they did not show any initiative in performing any promotional role to stimulate the demand for credit for production purposes. The conventional theory of commercial banking and the concern for short-run financial viability were probably the factors responsible for their lack of creative adjustment to the specific situation they faced. This study on India concentrates on: (i) the impact of branch expansion on resource mobilisation, credit allocation to small farmers, small industry and other small enterprises and transaction costs of the banks; (ii) economics of branch expansion; and (iii) the impact of credit guarantee schemes on lending to small enterprises and transaction costs of the banks. This study indicates the nature and characteristics of financiAl innovations required for the purpose of viable productive lending to small enterprises in agriculture as well as industry and for mobilising resources from the semi-urban and rural areas. Thus, it has relevance for the other LDCs with similar problems and policies. V.V. Bhatt Chap ter I DEPOSIT MOISILISATION The importance of financial institutions in promoting economic development has came to be increasingly accepted in recent years by policymakers in developing economies, even though their role in economic growth has been recognised in the literature for quite some time. Financial institutions can help the development process by influencing both savings and investment, Financial intermediaries help to-raise the level of savings by enabling economic units to hold their surpluses in assets which are of stable money value and of negligible risk of default. In the absence of such assets, the ultimate lenders may have to channel the surpluses into riskier assets which can act.as a disincentive for savings. Thus by offer- ing assets of different maturity and liquidity, the financial institutions raise the-level of savings at any level of income. Real growth depends not only on total investment but also its allocation,. The net productivity of capital will depend.upon. afficient allocation of savings among the users. By facilitating: the "migration of funds to the best user," the financial super- atructure can improve the economic performance.and accelerate economic growth. There is no doubt that financial institutions can play a facilitating. role in the process of,development. .Doubts, however, exist whether financial superstructure by itself can initiate development. Historical.evidence is.also not very clear z regarding the extent of financial deepening that is required to promata economic growth. Financial deepening can be measured by a variety of ratios and none of them seems to correlate well with 7 per capita real national product or any other index of economic development. Even accepting the fact that a superstructure of the financial institutions and instruments is a necessary though not a.sufficlent condition for economic growth, there are differences as to how such a superstructure can be built in a developing economy. Some hold the view that a capital .market can be developed only *if the real rates of return on financial assets are positive and high. It is in this context that the Indian experiment with a massive extension of commercial banking into.rural and other unbanked areas since 1969 merits special attention.. In 1969 the ratio of bank deposits to national income in India stood at 15 per cent. In tan years, this ratio rose to 30 per cent. The means adopted to bring about such a change are not necessa-ily. through manipulating the rates of return. The period since 1969 saw also a marked change in the pattern of credit granted by commercial banks. Thus a larger mobilisation of deposits and a change in the pattern of credit were sought to be achieved by a delibersta adoption of state policy consequent upon For a discussion of this question see: Edward S. Shaw, Financial Deecenino in Economic Oevelooment and Ronald Z. Mackinon, Money and' Finance in Economic Growth and Oeveloament. 3 the nationalisation of the major commercial banks in the country. The purpase of this study .is to analyse in depth some of the facets of banking development in India since 1969 in so far they provide some useful lessions for enlarging. the scope and usefulness of' commercial banking in general in developing countries. SOME ASPECTS OF BANKING OEVELOPMENT At the outset some of the salient features of the progress. o 2 banking in India since 1969 may be noted. The most spectacular aspect of the development has been in relation to bank coverage... The number of banking offices which stood at 8,,300 in June 196' rose to 15,400 in JunqL 1973 and to 25,000 in June 1977. Thus over. a period of eight years, the total. number of offices increased three-fald. As -a consequence population per bank office which i a good index of thj spread of banking declined from 65,000 iH 1969 to 23,000 in 1977. While population per bank. office in the developed countries like United States is still much lower at 5,000, the decline in population per office registered by the expansion of the banking system in India is certainly very impressive.., For a detailed description See. C. Rangarajan, "Banking Development since Nationalization and Reduction in oisparities," Sankhya, 1974, Vol.36, pp.417-440 and S.L. Shetty, "Performance of Commercial Banks since Nationalization of Major Banks: Promise and Reality," Economic and Political Weekly, August 1978. 劉 Tha pprizd. ýsince naticnalý.,.,ation alsa rgLcrded an impressive inczsa», In. deposilýi. Sank deposits-whý.ch stood at R-q.-41,565 erai:es as-at the 13'nd a f june 1965-ros-e to Rs.19,000 crores as at the endý a f Mazch1977,,. thus reg-istering fc3 ur, fa Id Increase. The Indian pubUa hag.. alwaye shcwn. a st=ngý, prsfersnce for fixed (tarm) dapcs£ta.-.The r . p opartion c,f fixed dep . os its to tatal deposita which stoa at 5 *per cmnt in 1969. rose, ta 56 pe'"céýt by 1976. There was a correspanding decline in the propartion af'ýcý.rrent deposita to tata-1 dý3posit3. Depcýýits callected at the rural centres constituted apprcxim-aýE3lyý* of the. total deýcsý.ts in lune 1969 and they- rate-ýto-ý' eight. pérý"cen.tý at the and of December 1974. Thus ttle zural affices ecntý.ibute...a very small pvopc-rtion of the total deposits thaugh they ..ýon.stituta 40 par -cent of the total of fices. ThQ dagree*org*aeqta"~l pýical concentr;atiorT In deposita is even ý.veata't than in bank offices. The five-måjam. cities af`the country acca'untad ýår 43 per cånt of the total. deposita in 1§69 ýý-nd the figure fai: 1974 is 40 per cent. ...The.,fi-ve states in which thess- citi,e!j ýerEi locatad accatinted fa.,c,. 60 per cent-o:f the total deposita. Ths'Cé, hais., been a- cert'ain quali+at£ýia c^hange in the. allocationý a f.,bank 1.969. .-The 'pclicymakcýs'have desIgnatad. certain, sectors as., sactoý3.:' include ag*riculture. small, scale Industries and smill: býs;ineéslasý,'. The share a f credit ta these. sectoris increased fram 14.0,,per cent in-June 1969 to 25.3 per cent in April 1976. Loaking at the distribution from a slightly different. . . . . . . . . . . . . . . angle one finds that the share of credit to agri,ulture and allied activities increased from 2.2 per cent in 1969 to 70.8 per cent in 1975. The share of large and medium industries declined during this period from 60.5 per cent to -44 per cent. The share of credit for trade declined from 19.2 per cent to 15.5 per cent.. However, credit for food procurement by, governmental agencies increased from 3"5 per cent to 8.8 per. cent. Increasing, attention is being paid to the credit-deposit ratio in diffferent states. This ratio with all its imperfections. is an indicator of how much of the resources mobilised in a particular area are being utilised .for granting credit in the same area.. Credit-deposit. ratios tend to differ significantly from- state to state. In 1969 among the major states, the lowest credit-deposit ratio was in 3ammu & Kashmir which was 12 per cent and the. highest was in Tamil Nadu which was 133.5 per cent.. The figures for the latter years indicats a drop in the ratios fEr the more advanced states and a rise in the ratio o f ti ie Is ss advanced states.. However, differences continue to persist for a variety of resasons. This phenomenon- is also reflected in the fact that the four major states in the country accounted for 58 per cent of the total credit granted in 1972. 'Similar unevenness in the distribution of credit is noted in relation to- different pa-pulation cantres also. The credit-deposit ratios of the metropolitan centres is nearly twice that of the ratios of rural centres.. This imolies a flow of funds from the rural to the metropolitan centres. 7 IS3UES IN CEPOSIT MCILISATION As mentioned åaclir.deposits with commercial banks increased fourfold durinq the- perod 1969-77' -ndoubtadly this large increase has alsa been fadiLijtatad by the sharp increase in pricå level witnessed during this- period. However,. as will be explained later in detail, the ratio o f deposita to national income has also shown a rise indicating that there haVe. been other .factors operating on the increasa in deposits. A lart.ilisat.on of deposits has been regarded as ana of the Lmportant gals of banking..development. Several issues arise .in relation to the f forts made by the banking system to ralse deposi.ts. In this chapter we. focus on.the following questions in relation to mobilisation ,of dAeposits Towhat extent asebzanch expansion contributad to* thåmobilisation af åäposits? 2. Has a utsion of Sñking. in rural ara laad ta. a changs in the preference particularly of the' rural households in te:ms of holding assäts? 3. To what. extent are depdsita-. fluenced by -changes 4 _,What has beenkth rei. a.f specil!:y-designed deposit schemes in atacting. deposits7 . 8 SRANC4 EXPANSION ANO OEPOST MOSILISATION The amunt of dapsita- £n· an acanory is largely influenced by the lavel of national. ±nco. Demand. deposits- primarily serve the function a f being trnsaction balances. In s far as income is a proxy for total t.ansactions, demand deposits can be treated as a function of inccøe.. Time deposita are a form of savings and can also be. treated as being influenced.. by income, even though there is same contrversy whethet ineome or wealth is the appro- pr£ate detørmining varIabl,. Branc±r,-xpanscn by spreading the banking habit over a wider geographical arsa, induces. a. large numer-- f.people to use bank deposits both. as a form of transaction balances. and as a form of saving. Alse a wide network ~i: branches by failitating transactions acrsq- dff=rent geographical areas rdcsthe rneed for holding a lager amount of` currenrcy. ThiS- pr&venta the outflow i.f reserves from the. banking system, lding7 to a larger expansion of secondary depcsis. Therefore,ne of the structural ch*nges to be expected from a massive branch CXrlenson prograema is a rising deposit-inome ratio. We have examined first the- behavicur of this ratio andt then analysad the direct contribution to deposits made by 'the branches opened since -1969. 9 DeRgslt-Income Ratia In Table 1.1 we have presented the data on total bank deposits, national income in outrent prices, the number of bank offices and the ratio between deposits and income for the years 1951-52 to 1975-76. The data indicate that even though the ratio has. been steadily increasing over years, there:has been a sharp rise in the past .seven years. The. deposit-income ratio increased from 12 per cent to 14. per cent: over a period of eleven years, beginning 1957-58. But in the -six 'years beginning 1969-70,, the ratia rose from 16,per cent to 22 per cent. -n order to- test more rigorously the hypothesis that the marginal deposit-income ratio has increased since 1969, we regressed th total deposits (TD) on national income in current price. (Y) and' a -dummy variabla (Ql. The dummy variable was. introduced to captire the shift in the slope of the. function rather than the constant term. The estimated equatäi.'was as follows: TO - - 968.151 +-.:18SY + .037YO (1) 1Ti.286) (3.11 ). -2 R..=.983 . In this and the following equations t? values are given In brackets below the coefficients. 10 TA6LE 1.1 : 0CEp0SIT-INCOME RATIO Yea Total. National Deposit3 Bank as at the deposit3 income income offfices end of (rupsøg llrvpcs ratio oC=res) 2.n currsnt pricee ) 1951-52 791 9970 0.05 2608 1952-53 799 ..9820 '0.08 2632 1953-54 817 10480 0.08 2675 1954-55 908 9610 0,09 2746 1955-56 1005 -9980. 0*9T 2791 19S6-57 1134 1131. 0.10 2966. 1957-58 1404 11390 0.12 3206 1958-59 1585 126c30 .13 3564 1959-60 12940 0.13 3860 1960-61 1746 13380 0.13 4080 1961-62 1922ý, 14161 0.14 4414 1962-63 2042 14999· 0.14 4612 1963-64 2285 17231 C.13. 5022 1964-65 2583. 20229 0.*3 5499 1965-66 2950 20801 0.14 5904 1966-67 3425 24048 0.14 6383 1967-68 3856 28430 0.14 6782' 1968-69 4338 2912C 0.15 8262. 1969-70 5028 32230 c.•.16 10131 1970-71 5906 34909 0.17 12013 1971-72 71"6. 36879 -0.19 13520 1972-73 "-43 3989 0.22 14739 1973-74 10139 49628 0.20 16503 1974-75 11827 58485 0.20 18180 1975-76 13482 60293 0.22 20171 The dummy variabla took the value of '1' for the years beginning 1969-70 and '0 in the earlier years. The equation shows that the marginal deposit income ratio has risen' froar .185 before 1969-70 to .222 thereafter. Since all the coefficients are statistically significant, the basic proposition that there has been a change.in the marginal propensity since 1969-70 is well-maintained4 One aspect of the branch expansion has been the massive exteion:*t6 rural. areas.. Tharefore. the change in the marginal propensity is likely to be reflected more in relation to the -.X.ural income. In order to test this hypothesis we regressed the total deposits on income originating in agricultural and allied activities (YA), incomeoriginating from nor-agricultural sector (Y and a dummy variable to capture the change in the marginal coefficient relating to agricultural income.. As in the earlier equation, the dummy variable took the value of 11' after 1969-70 and to' before that. The estimated equation-was as follows; TO - 845.736 + .106YA .064YA + *250YNA (2) (3.311) (3.274) (10.746) .9 8 4 12 Th±s equation also shows quite clearly the shift in the prpensity. in relation to ruraL income.. The margnal. depcsit- agricultural income ratia inceases from .106 to .17. The shift i of the sløpe by -064 in relation ta agricultural income corrss- pands.. ta a shift o f .037 .in relation tc total national income- as shown by equation. (I). The impact of branch expansion on the deposit-income ratio is also confirmed by the following equation where the ratic o f depsit.t..incme is regressed on bank cffices (80).. The estLmated. aquation was as fcll1oe.. Raticý cf de positýs €c inama *G.r9"+"é'bdQC7-8S -. 11, 648) -(3) å,..4 0bvICU:s5y the cefiientf'dr the bank` fia,s i aei m as the change in the ratlå that can be effected by an inrease ir a bank office can only be small. The coefficient is..highly signi- ficant confirming aur hypothesis. Since income directly and branches at one step remaved shculd in fluence the daposit holding, one can also discerrn the impact of branch expansian·Sý stimatln.g.ari a ruaion which relates 13: the totr I deposits to income anr' the number of bar#< af fices. Such an equation will show the impact of branches as distinct from income. Using the observations for the parICd 1951-52 to 19746-75 we regréssed the total bänk depqsits on income originating in -agricultural sector, income originating in non-agricultural sector and the number of banking offices (30). The estimatad equation was: TO . 1097.98 + .052Y + 127Y .37 E . (4) .A NIA (1.57) (3.33) (4.5) -2 i R = .98. - The impact of branches is quita clearly seen. However, it must be notad that this impact cannot be- just attributed to tha new; braches alonei. The: :oefficient for the branch variabla is the combined affect of -1d; and new branches. The some results- are: obtained if we use the· c.ross section data using the total deposits. in 'ea:h state as the idedent variable and the state income- (y) and the number of bn f ficqg- in. e ach st.nte .s independent vari.bles. 'ie -estimatad the squatiorfor the years 1973-74 and 1974-75. Since thd state incomä broken up into agricultural and non-agýicultural incomG is not readily available, we have used the total state income as the independent. variablei. The estimatad equations are as follows For 1973-74 Total Deposits in state = -237 .151Y· .395 60 (5) (1.815) 2(t·479)~ -2 - R.= .5 For 1974-75 Total deposits in state -231 + .158Y- .333 () *(2.248.)· -(1.425) -2 R ='59 14 The 92 is lower which is normal'.y the case in rel tion to equations estimatad from Croas s:ection data. The ce fficient for branch of fice is not satistically significant. However, the effact of branchea is more or lass of the same order as found in equation (4) using the time seris data. Contribution of New Branches While the earlier section has established that branch expansion has had an impact on growth a f deposits, we need to astimate the direct contribution of the new of ficus opened since July 1969 in the total deposits mobilised.* The indirect contribution resulting from- the reduction in cash drcin of the banking system is difficult to estimata. As a proportion af the total deposits,. the deposits collacted by the of fices opened since f969 rose from 9.6 per cent at the end of December 1972 to '21 per cent at the end- o.f December 1975. Their impact is mors clearly sc3r in relation to -..he changes in deposits. Betweenuly 1969 and December 1975.. the..total deposits ofo the banking systém increased by Ra.9,045 crores., Wf -this increase, Rs.6,13C Crores was cotributed by t.: cid of7i::es and aproximately Rs.2,900 Crores uas oontributed by the o ffices opened *it can be argued that it may- not be, valid to treat all the deposits collected by new branches as ne - addition to the total deposits. Part of the deposits collectad by the new branches wat. i have gone to the older brenches had thess branches not been opened. However, given the fet that bulk of the new offices--has been opened in unbanked centres, it is legitimate to treat as the first approximation the deposit3 collectad by the ne branches as being the affect of branch expansion. 15 TABLE 1.2 , SHAR OF Ný1 -FFICES 9' INCRMENTAL DEPOSITS ALL OFFICES (Ra. in crores) Period Total Contribution Contribution 3 as July 1969 increase by old' by offices % f 1 to December in deposits offices opened since July 1969. (1) (2) (3) 3694 2895 799 21.6 497 5418 4014 1404 25.9 1974 6946 4958 1988 28.62 3975 9045 5130 2915 32.2 *4 since 1969, Thus the new effices accounted ror 32 per cent cf the Incraase in the depesits during the five-year period. The shaze of the new offies. in this Incremental deposita has been increasing fram year to year as seen from Table 1.2. In 1972 the share of the new offices was 22 per- cent and in 1973 the share wae 25 per cent. The in=easing share is explained by two factors. One, the.number af neý officas is increasing from year to year as we are taking the cumulative total fram 1969. Twc, as branches beccme older they are able to mobilise a larger amount cf deposits. Sinci the bulk of the branch expansicn has been in rural areas,. ane sees a significant impact of the new offices in relaticn to inrease in deposits in the rural areas. Cf the increase of R-s.1 qz27 crres in rural. deposita witnessed during the six.-ye. periad, new offices contributed as much as Ra.665. crres (Table 1..3).. Thus roughly 65 per cent of the increase in rural deposits came from the new officea. Here again the share o f the new O ffices is increas- ing from year to year. As Tables 1.4, 1'15 and 1.6 indicate,. the share of the new coficas in the increase in the total deposits in semi-urban, urban and metrapolitan csntres has ranged between 25 per cent and 32 per cent. As at the end of December 1975, the depasits collected by the new offices formed 21 per cent af* the total deposita. However, the marginal ratio as indicated earlier was 32 -per cent.. Even thcugh the number a f n ew branches is almost ..................I.. 17 TABLE 1.3 : SHARE OF Nld OFFICES IN INCREMENTAL DEPOSITS RURAL OFFICES (Ra. in crores) Period Total Contribution Contribution 3 as % july 1969 increase by old offices by offices cf-1 to December in deposits opened sinco july 1969 1) (2 (3)(4) 1972 394 174 220 55.8 1973 596. . 234 362 60.7, 1974 783 290 493 62.9 1975 1027 362 665 64.7 T ALE -'.4 SHARE IF. NEJJ (FFICES IN INCREMENTAL DEOSITS SEMI-UR8AN OFFICES (Rs. in 8rores) Peziod Total Conribution Contributiorr 3 as% 5uly 1969 increase by old affices by affices of 1 to.Cacember in deposits open8d since july 19.59 (1) (2) ··(3)(4 1972 844 666 178 21.1 1973 1292 1021 271 20.9 1974 2531. 2153 378 14.9 1975 2075 1519 556 26.8 TABLE t.5 : SHARE OF NEW OFFICE5 IN INCREMENTA.L DEPOSITS URSAN OFFICS (Rs. in crores) Period Total Contribution Contribution 3 as % july 1969, Increass by old . by offices of 1 to December in dqpcsits 0 ffices opened since July 1969 1972 876 697 179 20-.4 1973 1286 990 2962' 1974 632 1180 452 27.6 1975 -2185 1493 692 31.7 19 • TABLE 1.6: SHARE 0, NEW OFFICES. IN INCREMENTAL DEPOSITS MTROPOLITAN OFFICES (Re. in croes) Period Total. Contribution Contribution 3 as July .1969 increase by old by offices of 1 to December in deposits offices opened since july 1969 (i (2) (4) 1972 1576 1356 220 13.9 1973 2242 1768 474 21..1 1974 2919 2256 663 22.7 1975 3758 2756· 1002 26.7 · 20 equivalent to the number o f old c ffices, the contribution of new offices to deposit mobiltsation is still small. It may be notad in this context that during this period- raughly 45 per cn.t o f the- new officas opened was in rural centres and deposits per branch In ruzal centres is much smaller as. campared with the metropolitan and. urban centres. We have also analysed. the data made available by some c f the lndividual banks. In the case of State Sank of India, as at the and a f December 1975 the branches opened since 1969 contributed only 17.5 per cent of the total deposits. The rest came from the old offices. In the case o-f depositå in *the rural centres, the new branches•contributsd half df the total. In· the case of åem;-urban branches,. deposits by new o ffices constituted only nine per cent of the total. In the case af two other banks, whose data we 'analysed,. we found that deposits mobilised by the offices opened since july 1969 contributed approxtmately 25 per cent of the total depoits. The dif'ference between the banks is accountad- for by the number of new offices opened in relation to -ld officss and· the composition of the officss in terms *f population centres. 21 Potential Contribution Though the offices opened since 1969 accounted for only 20 per cent of the deposits at the end of December 1975, the potential contribution to deposit mobilisation of these branches is likely to be quite large because there is evidence t- bulieve that as new offices grow older they are able to mo.bilise larger depositso As of March 1977, tie total number of.branches opened since 1969 was 16,540. Up to 1974, the annual increase was around 1,,700' a ffices. In 1976*77 the number of offices increased by 3,582. We have analysed the data regarding deposits. per branch in the case of old and new offices for the years 1972' and 1975. Relevant data are proyided in Table 1.7. It can be seen that the deposits per branch in the case of old offices- increased by 40. per cent between 1972 and 1975. The deposits per branch. in the case of the new offices increased by 90 per cent during. the same' period. A more or less similar difference in the rates of growth is seen in the case of offices in the different population centres. However, this does not fully confirm the hypothesis that as offices grow old, they attract more deposits as new offices (as defined by us)'also include some offices that are 22 TASLE 1.7 : OEPOSITS PER SRANCH IN OLO ANO NtW OFFICES (Rs; in lakhe) Old,cffices New offices deposita per branch deposita per, branch at the end of '2¾I at the end 0 f 54 1972 1975 1972 1975 Ci) (2) (3) (4) (5)' (6) Rural 2C.85 34.93 1.& 5.15, 11.,75 1.92 Semi-urb3an 52..93 76.56 1.45 13.34 19.53 1.47 Jrban 104.34 142.96 1.37 24.28 36.52 1.51 Metroolitan 249.91 336.49 1.35 33.78 66.65 1.97 TOTAL 94.36 132.30 1.40 12.68 24.52 1.93 ..... .... ... .... 23- six years old whereas some of the offices defined as old offices. may only be seven or eight years old., We, therefore, decided to look at the- data of a single bank in terms of the rate of growth of deposits of branches opened in a specific year. One bank falling in the deposit group of Rs.300 to Rs.400 crores made available to us specially collected data- indicating.--- the growth of deposits of branches opened in the' various years. - The bianches openad in 1969 in this particular bank had deposits of Ra.1.23 crores at the end of 1969. The same branches accounted for: Rs.4.45 crores at. the end.of the next year and accounted for approximately Rs.20 crores at the end of 1975.. Thus, in a period of seven years, the deposits increased twenty-fold. Anual compound rate of' growth will be 50 per cent. If we calculate the percentage growth year after year, the earlier years show a Very high growth rate partly because of the small base. However, even-aftar six years, -the -annual- rate of growth is-.bot less than 18 per cent. Based on the data provided by a bank on the deposits collected by the branches. opened in a specific year in the subsequent years, we havu computed the year to year growth rate. These are presented in Table 1,S and the data clearly show that deposits tend to grow at a fast rate in the first six years after a branch is opened. 241 TAGLE t.8 PERCENTAGE INCREASE IN DEPOSITS FROM YEAR TO YEAR Branches 1970 1971 1972 1973 1974 1975 1976 opened in 1969 261.79 74.15 29.29 38.02 6..79 10.69 18.16 197a 164.32 89.9 45.78 6.S 23.52 22.28 1971 190.95 51.82 -19.94 39.39 ·39.48 1972 252.48 60.8 24.50 41.76 1973 130.13 57.77 39.57 1974 181.36 64.19 1975 234.10 25 TASLE 1.9 GRMWTH OF OEPOSITS PER BRANCH ALL BRANCHES (Ra. in thousands) Deposits per 'granched opened durinq branch In- 1969 1970 1971 -. 1972 1973 1974 1975 1976 1969 362 1970 1309 323 1971 22.79 853 702 1972 2947 1620 2040 476 1973 4068 2361 3098 1672 844 1974. 4344 2523 3715 2693 1943 674 1975 4808 3146, 5234 3353 3064 • 947 853 1976 5682 4039 7303 4801 4277 3197 2853 790 RURAL BRANCHES Branches opened during Deposits per branch in 1969 -,1970: .1971 1972 1973 1974 '1975 1976 1969 268 1970 750 186 1971 1109. 486 274 1972 1541 815 623 103 1973 2036 1222 969 478 217, 1974 2355 1488 1206 684 629 355 1975 2688 1904 1588 834 934 1100 457 1976 . 3146 2528 2164 1.182 1429 , 2125 1146 291, . . 26 Since the rate of growth will be in fluencad not only by the age of a branch but also by the. general ecomic conditions, we subjected the data to a different kind of analysis to find. -- . out separataly the impact of age. From the data on the. total amount of deposits collected by the branches opened in a. particular year, we computed the deposits pe branch in various years. In Table 1.9 we have, shoCn how the deposits per branch of the offices opened in the years 1969 to 1976 have behaved. \de have given the data in relation to all branches and also . separately for rural branches. Read vertically, 'the figures indicate the depozits per branch in various years of the offices opened in a particular year.- For example,. column (1) shows the deposits per branch of all offices opened in 1969 in the years 1969 to 1976. Quita *clearly one. sees that the deposits per branch increase as the branches become older. However, as mentioned earlier, this can also be due to the impact of the general economic conditions. Sut read horizontally, the figures show the average deposits per branch in a particular year of the branches opened in the previous years. For example in 1970 the deposits per branch of' all branches opened in 1969 was Rs..13,09 2?7 lakhs whereas the deposits per branch of the offices opened in 1970 was Ra.3.23 lakhs. To cite another example, in 1975 the deposits per branch of the offices opened in 1969 and in the subsequent six yearl were respectively Rs.48.08 lakhs, Ra.31.4& lakhs, Rs.52..34 lakhs, Rs.33.53 lakhs, Rs.30.54 lakhs, Rs.19.47 lakhs and Rs.8.53 lakhs. 'Thus it can be seen that in general the older the branch the larger the deposits. However, it may be noted that the branches opened in 1971 have for some reason generated a much larger amount of deposits per branch since they were set up. Branches opened in 1971 collected deposits in the very first year twice as much deposits as branches opened in 1970 collected in their first year and this substantial increase upsets the general pattern. The picture .in relation to ttr rural branches also reveals that the branch which is older has more deposits than a branch which is opened earlier. There is thus enough evidence to indicate that the deposits tend to increase as age increases. Obviously, the rates of growth go down but the data collected on new offices indicate that the annual rate of growth appears to be quite high for the first six years. The conclusions reached above are also confirmed by an analysis -of the data of another- bank which is dominant in one part of the country. In this bank, the deposits of the branches opened in 1970 were s 18;84 at the end of that year. They increased approximately to Rs.16 crares by the end of 1976, thus registering, a twenty-fold increase during a period of six years. In the case of this bank, we analysed each. of the branches opened in 1970 and examined its deposit growth. There. was no branch whose deposits had not grown during the six-year period by less than four times. Nearly half of the branches opened in 1970 had deposits at the end of 1976 ten times the deposits in 1970.. It is true that the growth of deposits in individual banks is also. influenced by their ability to take away deposits from other banks. It is, therefore, possible that some banks might show very large increases.. Nevertheless, the high potential. of the branches in the first six years- is well established by the data that we had analysed. . Our analysis also shows that the amount of deposits attracted by new branches in their- very first year of operation is not progressively declining. As can be seen from Table 1.9, the deposits per branch of the offices opened in rural centres in 1973, 1974 and 1975 were respectively As.2.17 lakhs, Rs.S.55 lakhs and RA.4%57 lakhs., There is, however,' a decline in the case of offices opened in 1976.. The generally-held belief that banks open branches initially in the. more prosperous areas and then go to less. prosperous regiors is not substantiated by these data, .29 While the data that we have assembled clearly indicte a high reta o f growth in the first five to six yemrs o f the existence of a brench,. aggregative data on s.ingle office centres Indicate- that many centres with only one commercial bank office tand to continue for long as such without oponing more bank offices. In June 1969 there were 2,554 flona officest. Five and a half years later in Decenber 1974 more than half af them (1293) continued·t3 be the only commercial bank of fices in their centres.. Perhaps this indicates the limitad scope of the business. However, we. analysed the data relnvant to the State of Gujarat to find out how long it takos for the number of branches. in a centre to increase. Since data an centres with one office are not. published: for reascs, of confidantimlity we had to con.tent our- selues. -with only exaining the time taken far centres with two offices -t grow intc three and centres with thren offices to graw inta fioura tc. We ex=minad the data for the .year 1970 and found that of all. the centres with twc officas in 1970 in the State of' Gujarat. approximately 11 pr cent became threo offices centres in cne year. Fourteen per cent of the centres with three offics becama centres with four offices in ona year, Twerrty three per cent of the csntrsc ivith four offices bacemo centres with five offices in one year mnd 50 prr cent of the centres with five offices became centres with jix oaF2ices. in ona year. These data also indicate the possibility of better exploitation after the first few y-ars. 38 The broad conclusion that pmerges from the ve-:ious types' of data .a have collactad. is~that deposits te.and 'to grow at a fast rate in the .t six years of the setting up of a. bank 'offics. This is indepen- dent of the general economic factors. that may be operating. One .:..on, for the rapid expansion of depositi'as branches grow in ·age .nit.ially may be that they are able to exploit the rpotential' in a place fully during this period. This has an important bearing in ssing the inpact on deposit mobilisation:of the branches opened- .-nce 1969. Their full impact is perhaps ybt to be realised. Also this hat implications in tarms of the profitability of banking.. The Arge number of branches- opened in recent y:ears. may be uneconomi at the moment because of thl low volume of deposits that they are able to attract currently . Secause of the sudden spurt in the opening of branches.in t4e past onedecade, the proportion of. uneconomic branches to economic branches may also be high.* But. in course of time', many a f the branches will bie able to attract .arger deposits sc that, the ratio of uneconomic branches to economic branches can. decling. CHANGES IN ASSET .PREFERENCES The next issue that we examine in relation to deposit mobili- sation is ýihether the massive 'extension of branches into rural areas '-na resultad -in a change in the ässet preferences of the rural people a discussion of branch profitability, see the companion volume if this study by Pro fes•sor Paul Mampilly. 31 It will be particularly interes:ing to find out w.iether. there has been a shift aay from holding such assets as gold and jewellery and towards deposits in the financial institutions. While the issue is interesting, it is difficult to find definite answers at this point.. For one thing, the extension into rural areas by commercial banks on any significant scale has only been of recent origin and therefore its impact on fundamental behavioural characteristics such as asset holding may take a much longer time to be felt. Second, one has to. conduct an extensive survey at two points in time separated by several years to find out if there has been any change in the asset preferences. It is hazardous to make generalisations based an surveys confined to a village or two. We, therefore, dec-ided to subject the. data collected by the.All-India Oebt and Investment Survey (AIDIS) conducted by the Reserve Bank of India to a critical examination. to find out what inferences one can drag on this issue of aset preferences. The AIDIS reported on the assets and liabilities of rural households as on 30th June 1971. The Reserve Bank of India had earlier conducted a-survey called the All India Rural Debt and Investment Survey which reported on the assets and liabilities of rural households as on December 1961' A comparison of these two surveys should provide some clue regarding changes in asset preferences. We supplemented this analysis with an examination of several.surveys undertaken by agro-economic research centres attached to various universities on the subject.of income, saving and investment in selected areas. These surveys had been sponsored 32 *- by the fMinistry of Agriculture jf the Government - f India. A major ditfficulty in ralaticn to such.. surveys is that most c f them Cover about a hundrsd houssholds anl given the sampling design and the limited households, covered, it .would not be proper to make any generalisaticns. These surveys may, however, provide some useful insights. \Ue have, therefzrq, collated the information availablca fr=m a number of such survey,s. conducted in different parts of the country to get some understandýing on the pattern of asset hclding. in rural areas. Towards tha end we have also looked at. the asset prefarences in general cf' allhoseholds. Asset haldino in 197¶ The AIIS ostimated tha total rural householdsin India at 770 lakhs in 1977. The total assets of all rural hcuseholds as on :une 30, 1971 were estimated. to be Rs.7,131 crorez. The total assets surveyed included land, buildings,. livestock, agrijcultural implemnents and machinery, transpc:t equipment, durable household assets and financial assets like National Plan Saviings crtificates, Government Securities,an Sha.s and Debentures of còérporate and co-opeative institutions, deposits with banks. and. others. The total value of the financial assets held by all rural hausehold waz estimatad as Rs-.930 crores which constituted 1.1 per cent o f the total assets. Thus, financial assets formed a negligible pertion of the total assets. Th3 total investment in f`Z-ancial asseta o f '.s.930 croras comprised of b.790 corss. by way of dmposits and Rs.140 crores, by iay cf shares.'' -As,can be seen from Table 1.10, the bulk caf the 1hvgstment in shar'es was in the co-operatives. Gut of Rs.140 czcres o.f investment in shares, Rs.131 crores was in co-ope=atives. TABLE 1.10 AVERAGE. VALUE PER HOUSEHOLD AND AGREGATE VALUE 3 INVESTMENT IN SHARES OF ALL RURAL HOSEKOLDS (As on June 30, 1971) Aggregate Average Shares value .value per tems) (rupees hs ehold crores)(R. 11. Co-operatives 131.0 17 2. Banks 3.8 Negliglble 3. Compan±es 4.7 4. Units cf th - Unit Trst 0.4 Negligibl TOTAL 139.9 18 O i. The distribution of investmen: in deposits is povided in Table 1.11. Cntibutions to provident fund constituted the major share. It formad approximately 35 per cent of 'the total deposits. States like Assam and West Bengal which have plantations in rural areas account for bulk of the investment in provident fund contributions. Insurance premium contributed 20 per cent of the investment- in financial.ass ets other than shares and deposits in commercial banks about 17 per Lent. The share of deposits in post ofice was roughly 12 per cent. In Table 1.12 we have shotn- the distribution of various financial assets held by rural households in difforent states. The total deposits with commercial banks held by the rural 'hduse- holds has been estimated at Rs.135.8 crores. Kela accounted for 17 oer cant of the total deposits with commercial banks and the other important states were Behar, Punjab, -Jttar Pradash.and Uist Bengal. The distribution of deposits in.: commcrcial banks statewise as given in the survey report does not match with eithor the d.istribution of rural offices or rural deposits statewise. We have given the relevant data in Table'-.13. In fact, when a comparison is made with the 1961 survey, there 'are certain other features in the statewise distribution which are intriguing. 35 TABLE 1 ..1 AVERAGE VALUE PEfR OUSEHOLO ANO AGCGREGTE VALUE OF OEPOSITS OF -ALL RURML HOUSEHOLDS (Ason 3iune 30, 1971) Aggregata, Av.erage Oaposit value value per (itams) (R3. crores) housshold (Rs. 1.,~ NationaiVpUrn savings certificate 14u1 2 2.. Treasury savings deposit cert.ficates 0. Negligible 3. Govsetrnent securities 4. Cash ce tificai;es o.? .commnrciaL, banks 13.3 2 . 5. Dposits in post 0 ffices 94.i 12 6.. Annuity deposits 2 Negligible 7.. eps:ts in co-prative 'societieå and baýnks . 1. 8. Deposits in commercial banks .1:35.8 18 9. Deposits in non-banking companies 6.6 I 10 Pepsits with individuals 29,9 4 1.1. 0 .ier depcsits 41 .9 4 12. Provi-dent fund 274.8 36 13. Insurn-nce promia 151.7 20 TOTAL 790.2 1d3 36 TABLE 1.12 FINANCIAL ASST QF All RURAL HOUSEHOLDS (As on Juno 30, 1971 Total Deppelte Depositu Doposit a Deposita Inau- Proul- GtharaQ Total Total Total Ratio Sta Sharea with in with with Non- rance dent dopo- finn- asaetat of Coopara- Post Commercial Banking pra- Fund aita cial Col.11 tiue Officoe banka Companis* ila asete to 12 Bank ' 1 2 3 4 5 6 7 a 9 10 11 12 13 Andhra Pradech b.3 0.2 0.7 9.!5 Nag. 1.7 6.6 1,1 26,8 32.1 5406.0 0.6 Aasam 0.4 0.3 2.9 1.8 Nag. 4.2 23.1 4,1 36,4 36.8 1517.0 2.4 bihar 2.9 Nag. 6.6 18.8 ' 2.0 10.6 28.1' 27.3 93.4 96.3 11070.1 0.9 Gujarat 25.9 3.2 3.3 8.4 Nag. 11.6 13.1 3.4 43,0 68.9 4858.8 1.4 Htaryana 2.5 0.1 1.6 1.8 Nag. 1.0 1.3 1.2 7.0 9.5 2871.0 0.3 Himachal Pradech 1.0 0.2 2.0 b.3 Någ. 0.7 2.7 0.9 6.8 7.8 1042.7 0.7 Jammu & Kachmir b,5 Neg. 1.3 b.6 0,6 2.5 0.2 5.2 5.7 .851.0 0.7 Karnataka 9.8 1.1 0.8 3.9 Nag. 25.9 4.2 6.4 42.3 52.1 4187.0 1.2 Kerala 6.1 1.3 2.2 23.0 Nag. 14.4 24.2 12.4 77.5 83.6 3024.5 2.8 Madhya Pradsh 4.8 0.7 2.3 1,9 Neg. 4.0 16.2 2.4 27.5 32.3 6222.3 0.5 Maharaahtra 45.4 3.5 - 6.1 8.0 0.6 6.9 22.0 3.7 50,- 96.2 7002.4 1.4 1r,asa 1,7 0.5 - 3.8 0.3 Nag. 1.0 4.4 4.0 14.0 15.7 2211.8 0.7 Punjab 6.9 1.1 8.8 . 14.0 1.| 3.5 5.5- 10. 44.9 '51.8 4936.4 1.0- Rajasthan 2.8 1.2 0.6 5.2 0.2 11.2 3.2 3.3 24.9 27.7 3993.1 0.7 Tamil Nadu 9.0 0.5 2.5 5.9 Ne9, 10.7 . 20.5 8.5 48.6 57.6 4391.7 1.3 Ottar Pradesh .11.3 2.0 25.9 16.1 1.8 16.7 29.7 13.0 105.2 116.5 18549.9 0.6 Ideat Bengal 3,1 3.4 23.0 13.6 . 0.2 17.7 61.8 5.3 125.0 128.1 4458.1 2.9 All India+ 139.9 19.5 94.8 135.8 6.6 151.7 274.8 107.0 790.2 930.1 07131.6 1.1 * Includea deposlta with Joint-Stock Companies 0 Include Nationl Plan Savinga Cortificates, Treasury Snvinga Deposit Certifivates, Government Sucuritiaa, Cash Certificatoe of Commercial Banka, Annuity Depoolta with Individuale and Chit Funds, + Including Manipur, Tripura, Delhi, Goa, Pondicherry and Meghalaya £ The figures of total auseta are baaed on aummary block data. 37 TABLE 1.13 i STATEWIS.. DISTRIBUTION oF LPOSITS Deposits Proportion liural Propor- Number Propor- with of each deposits tion of of tion - commercial state to as on each rural to State banks as. total December state offices total pär AIIDS (in %) 1972 to total in ruval as on June (Rs. in (in %) December o ffices 1971 (Ra. orores) 1972 (in %) in orores) Andhra Pradesh 9.5 7.0 21.6 4.2 358 7.0 Assem 18 1.3 7.02 1.4 62 1.2 Bihar 18.8 13.9 22.67 4.4 199 3.9 Gujarat 8.4 6.2 78.15 15.2 521 10.2 Haryana 1.8 1.3 11..77 2.3 -136 2..7 Himachal Pradesh 0.3 0.2 20.66 .4.0 95. '1.9 Jammu & Kashmir 0.6 0.4 5.78 1.2 57 1.1 Karnatdka 3.9 3.0 55.25 10.7 620 12.1 Korala 23.0 17.0 36,38 7.0 394 7.7 Madhya Pradesh 1.9 1.5 14,73 .2.9 2917 5.8 Maharashtra 8.0 6.0 31.09 6.1 397 7.8 Orissa 0.3 0.2 5.79 1.2 81 1.6 Pun jab 14.6 10.4 65.82 12.8 ·329 6'4 Rajasthan 5.2 4.0 18.97 3.7 292 5.7 Tamil Nadu 5.9 4.3 25.25 5.0 420 8.2 Uttar Pradesh 16·.1 12.d 64441 125 5.53 10.8 West Bengal 13. -70.3 27.93 5.4 160 3.1 All India 135.8 100 573.33 -00 5109 100 38 TMi survey estimate of Rs.135.3 crores appors to bä an under- astimation. As on. December 31, 1971 the total. amount af doposits in commarcial banks in rural centres was Rs.380 crores. Rural Cnfres as mentioned earlier are defined as centres with a population of 10,000 and leså. Sut the t r 'rural" is used with a different connotation in the All India Cebt and InvastmGnt Survey. It is assaciated with agriculture and allied activitics. Detailed data on the break-up of rural officess according to population Ls not 'available, Eut according to the data available in the annual reports of the Statz, Bank of India, roughly ono-half af the offices in the rural centres was in centres with a populatiorn of 5,000 and less.. If this definition corresponds more closely to the concept of 'rural' as used in the survey, 'perhaps one can treat half of thi- deposits in rural centres as being comparnble with AIDIS estimat3. However, even if we treat that the total amount of deposits in- commercial, banks held by'the rural house- helds is o f the order'of Rs.200 crores, it ill not meko much difforence in terms of the percentage to the total assets. Of the total financial assets of Rs.930 crores, th bulk of it is held by the cultivators as shown in Tablo 1.14. However, financial assets as a percontage 9f total assetå was the highest In the category of 'others- under, non-cultivators. These include 39 TABLE 1.14 : FINANCIAL ASSCTS OF RURAL HOUSEHOLDS (As on June 30, 1971) Tdtai Average per Financial f:nancial household(Rs.) assets as a of asaGts total assets Catagcry (Ra.. ... Shares Deposits of the respcc- r'ores) tive category Cultivators . 23 91 0.8 Non-cultivators 292 5 133 5.3 1, Agricultural labourers 12 1 9 0.9 2. Artisans -0 5 47 2.2 3. Gthers 270. 10 322 7.1 All Households 930 18 103 1.1, •• " TABLE 1.15 : FINANCIAL ASSETS CF ALL RURAL HOUSEHOLD EXCLUOING CASH OLES (As an June 30, 1971) (R. in cres) Asset group All India 0 500 ·:2.3 (0.2) 500 - 1000 6 (0-.7) 1000 - 2500 44.1 (4.7) 2500 - 5000 72.9 (7.8) 5000 - 10000 97.4 (10.5) 10000 - 15000 75,i- (8.1) 15000 - 2c000 44.7 (4.8) 20000 - 30000 179.8 (19.3) 30000 - 50000 . . ·06.5• 50000 - 100000 127.1 (1 3.8) Over 100000 .172.3 TOTAL 930.1 Note:a Figures In brackets relata to percantage to. total financial assets 41 all non-cultivators, who aro not agricultural labourers and artisans. As is to be expected, the bulk of the financial.. assets is held by households falling in asset groups worth mo.re than Rs.15,000. This is seen from Table- 1.15. Compar ison. of the Survevs'of 1961 and 1971 The total financial assets, according to 1961 survey, held by rural households was Rs.288 crores. This has increased by Rs.642 crores to Rs.930 crares in 1971. This represents an increase of 223 per cent. However, in proportion to total assets hold by the; households there was onlXa small increase. It rose from 0.8 per cent to 1.1 par cent during the decade. Thus there was no significant change in the proportion of financial assets io the total assets of rural households. According to the 1961 survey, deposits with commercial banks.. was Rs.44,5 crares, They increased to 135.8 crores in 1971. Thus there. was an' increase of 350 per cent during tho decade. Howover, the statewise comparison "of the holdings of doposits a.f commercial banks in 1961 and 1971 as shown in Tablo 1.16 reveal soma ,strange patterns. It is seen from this table that the depcsits in Gujarat, Tamil Nadu and Karnataka decreased during this period even in absolute amount. This is a surprising conclusion bocauso these - 44 among financial. assets. The amounta hold in provident fund and insurance premium are not available for the year 1961* It ist therafara,_ not possible to draw any cahclusions on the rate of growth of.these assets during this decade :However, in comparison with other forms af financial assets, deposits with commercial banka have shown the largest rise4 Oeposits in commercial banks per, household increased from Rs.5.4 to Rs.18-.3 which is an increase by 3*4 times. 000asits in the past office savings accounts per house'Aald increased during this period by IoS times. Since the massive extension of branches into rural ILI areas began only in 1969, its impact would not have been fully felt in 1971. However,, the increase by 3.5 times even during a decade of a moderate rise in rural branches of'-commercial banks indicates that the bank deposits as a form of asset will become increasingly important in the future. These data also indicate that insurance has also become a very strong competitor as a form I of assat holding. The survey data do net give separate figures fo:r holdings in the form af gald and jewallery, It is, the raforo, not poasible to make.any comments an the relative'proferances between gold and finan cial ass eta. Inferences from other Surveys gs mentioned at the beginning, a number of surveys hase been conducted by agro-economic research centres attached to different universitics to study- the income, savings, and investment of rural households in different districts. Also, as mentioned earlier, as the sample coverage of these surveys is limited, it is difficult to draw conclusions that are uniformly applicabla. In many surveys, the number of households failing in the highest asset groups is ane or two. However, they provide some insights regarding the behavioural characteristics of rural households. That is why, insteadI of relying on one survey we have attempted to bring together a number of surveys conducted in different parts of' the country to find out whether there- is a common pattern emerging. Relevant to our enquiry are the data collected by these surveys dn the asset holdings of the agricultural households. Most of the surveys provide the asset holdings at two points in time separated by a year so that one can find out the change in the assat holding as well. However, it would not be correct to draw inferences on shifts in asset holding with the help of the data of one year as the particular conditions prevailing in one year such as drought or floods can significantly alter the holding of certain .assets. 46 We have looked at the surveys. conducted 4n six districts. These are Surat in Gu jarat, Ahmednagar in Maharashtra, Kota in Rajasthan, Purnea in Sihar, Tikamgarh in Madhya Pradesh and Tanjare in Tamil Nadu. All these surveys relate to the period 1969-1972. We have. examined the data thrown up by these surveys not only to find out the role of financial assets but also the relative importance of gold and jewellery and financial assets in the total asset holdings. We have summarised in Table 1,17 the pattern of asset hold- ing in these districts as revealed by these surveys. The detailed data are provided in Tables 1.17 to 1.22. Wdhile in three out of the six. surveys separate data are,provided for holdings in gold and jewellery and financial assets, in three other surveys these are not separated and therefore the relative roles of these two classes of assets cannot be studied. One striking factor that emerges Srom aLl the surveys is that real productive assets such as land, livestock and residential houses dominate the holdings. They vary between 94 per cent arid.,98 per cent of the total assets. The role of financial assets and gold and jewellery is minor in the total picture. In general, gold and jewellery appear to be more important as a form of asset than the financial assets. This comes out clearly in the case of Kota and Tanjore. In these 47 TABLE 1.17 : (A) AcSSET PREFERENCES OF RURAL HOUSEHOLDS - PROPORTION TO TOTAL ASSETS Real Gold and Financial Distriet, productive jewellery assets assets Surat (Gujarat) 96.04 1.96 2.00 Ahmednagar (Maharashtra) 97.69 - 2.31* Kota (Rajasthan) 95.97 3.45 0.58 Purnea (Sihar) 98.14 1.86* Tikamgarh (Madhya Pradesh) 98.29 1..51, 0.20 Tanjare (Tamil Nadu) 93Å93 4.91 1.16 (B) ASSET PREFERENCES OF RURAL HOUSEHOLDS - PROPORTION OF THE CHANGE IN ASSETS Real Gold and Financial Oistrict productive jewellary assets assets Surat (Gujarat) +84.78 +8.48 +6.74 Ahmednagar'(Maharashtra) +84.08 - +15.92* Kota (Rajasthan) +83.94 6.86 9.20 Purnea (Bihar) N.A.. N.A. N.A. Tikamgarh (Madhya Pradosh) 94.23 5.77 Tanjoro (Tamil Nadu) N,A. N.A.. N.A. Financial assets include gold and jewellery Non-agricultural assets 48 TABLE 11 : pER H(USEHOL ASSET POSITION SY OPERATIINAL HOLDING GROUP5: SURAT CISTRICT 1969-70 nir rupees) Size af' oparational Rael Gold and Financial ha.lding groups prcductive jawellary assets Total hectargs assets v.auG value 1.01 - 2.00 51300' 470 230 42000 (9.66 . (c..90) (0.44) (100.00«G 2.01 - 3.00 57542 1244 797 59583 (96.57) (2.49) (1.34) (100.00) 3.01 4.00 70689 1243 1508 73440 (95.26) (1.69) (2.05) (100.00) 4.01 - 5.00 86690 1663 2365 90718 (9.5.56) (1..83) (2..81) (1030.00) 5.01 - 7.50 107636 2348 2826 112810 (95.41) (2.08) (2.51) (1CQ.QQ) 7.51 - 10.00 140674 2367 1854 144895 (97.09) (1.63) (1.28) (tac.C3c). 10.41- - ·15.00 174604 4281 4419 - - 183304 (95.25) (2.34) (2.41) (100.00) 15.01 - and above 248192 7229 4611 260032 (95,4-5) (2,79) (1,77) (1013,0n) TOTAL 102610 2093 2141 106244 (96.04) (1.96) (2.00) (100.00) Note: Fi±urés in brackets are percentage to total 49 TABLE 1.19 : P.R HOUSCHOLD ASSET POSITION BY INCOME GROUPS: AHMEONAGAR 1971-72 (in- rupees) Incoma Odal Financial group productive assets* Total (Ra.) assets Up to 1000 pgr household 40451 546 40997 Pbrcentaga 98.67 1.33 100.00 1001 - 2500 per houschold 29040- 333 29.373 Percentago 98.87 1.13 100.00 2501 - 6000 por houschold 46694 1091 477815 Percentage 97.72 2.28 100.00 6001:- 15000'pei household 102.759 1563 104322 Percentage 95.50 4.50 100.0 15001 and abova por household 219827 6664 226491 Petcentago .. 97,06 2.94 I00.00 TOTAL per housohold 86786 2056 88842 Percentage 97.69 2.31 100.d0 includes jew3llery .ULL- b 50 TABLE 1.20 : PER HOUSEHOLO ASEET POSITION SY HOLJING GROUPS : KOTA DISTRICT 1970-71 Oporational holding Real Gold and Financial Total group (hectarms) productivm jewallery aseets asaGta 0.51 - 1.00 11025.5 500.40 40.00 11565.50 (95.33) (4.32) (0.35) (100.00) 1.01 - 2:00 14241'.79 507.84 102.14 14851.77 (95.a9) (3.43) (0.5a) (100.00) 2.01 - 3.00 . 20559.67 1083.34 114.60 21757.61 * (94..49) (4.98) (0.53) (100.00) 3.01 - 4.00 22808.00 922.46 138.85 23869.31 (95.-56) (3.86) (0.58) (1(0.O) 4.01 - 5.00 30039.3E 1432.77 50.68 31522.80 (95.29) (4,55) (0.16) (ic.co) 5.01 - 7.50 42539.28 1242.31 290.28 44071.87 (.96.52) (2.82) (c..66) (100.co) 7.51 - 10.o0 68438.1 1773.33 138.57 70350.00 (97.28) (2.52) (0.20) (100.00) 10.01 - 15.40 56195.d2 2364.78 590.65 61150.45 (95.161 (3.87) (0.97) (100.00) 15.01 - and above 193976.65 4465.72 1735.28 200177.65 (96.90) (2.23) (0.87) (100.00) TOTAL 35385.72 1273.60 212.71 36872.03 (95.97) (3.45) (0.58) (100.00) L\I TAELE 1.21. : PER HOUSEHOLD ASSET POSITION BY LAND HOLOING GROUPS : PURNEA DISTRICT 1970-71 (in rupees) Land Real Financial Total holding productive assets groups assata 0 - 0.50 5447.40 76.00- 5523.40 (98.62) (1.38). (100.00) 0.51 - 1.00 6181.0 -o 6181.00. (100.00) (100.o0) 1.01 - 2.00 10931.,6. 76.26. 11007.95 (99.31) (0.69) (100.00) 2.01 - 3.00 19094.19. 50..63 19154.81 (99.68.) (0.32) (1001.00) 3.01 - 4.00 18236.00 298.91 18534.91 (98.39) (1.61)(1.0(1) 4.01 - 5.00 34022.79 197.57 34220.36 (99.42) (0.58) (100.00) 5.i1 - 7.50 41961.54 581.43 42543.07 (98.63). (1.37) (100.00) 7.51 - 10.00 63383.00 287.50 63670.50 (99.55) (0.45) (O.00) 10.01 - 15.00 75663.43 3131.57 78795.00 (96.03) (3.97) (00.00) 15.01 - and-abova, 216156.50 7270.25 223426.75 (96.75) (3.25) (1c0.00) TOTAL 37185.20 702.95 37888.15 (98.14) (1.66) (100.00) 52 TA8LE 1.22 : PE HOUSEHGLO ASSET POSITION BY INCGME GROUPS: TIKAMGARH 0ITRICT 1971 - 72 (n rupees) Income Agricultural Nn-agricultural Financial Total Groups Assete Assets Aspect; Uoto 500 1432.50 22.00 1454.50 (98.49) (1.51) (100.00) 501 1000 2770.00 22.00 2792.00 (99.21) (0.79) (IO0.GO) 1001 1500 4898.25 11.00 4909.25 (99.78) (0.22) (1c3.00) 1501 - 2500 11530.06 67.94 18.00 11616.00 (99.26) (.58) (0.16) (100.00) 2501 - 4000 10821.35 100.58 24.13 10946..06 (98..86) (0.92) (0.22) (100.o) 4001 - 6000 13723.99 139.89 29.47 13898.35 (98.78') (1.1) (0.21.) (100.00) 6001 - 10000 23885.15 406.07 37.67.. 24328.89 (98.18) (1.57) (0.15) (100o.00) 10001 - 115000 26218.82 604.14 97.14 26920.10 (97.39) (2.24) (o.36) (100.00) 15.001 - 25000 41427.40 729.60 63.60 42226.60 (1.73) (0.1,5) (100.00) 25001 and above 57717.00 2352.50 110.00 57179.50 (95.69) (4..12) (0.19) (0.0 Total 16647.03 256.04 34.63 16937.70 (98.29) (1.51) (0.20.) (100.00) 53 TASLE- 1.23 : PER HOUSEHCL0 ASSET P0'ITIQN SY ASSET HOLOING GROUP TAiN30RE DISTRICT 1.971 - 72 Asset Holding Real, Financial Othars (Mostly Toa Group (Rs.) Productiv9 Assets Gold & Jewellery) Assets Upto 5000 30018 - 130.9 3132.7 (95.-82) (4&18) 5001 10000 7939.3 0.88 240 8180.2 (97.06) (1.51) (2.93) 10001 - 15000 12588.2 1.8 468.7 13058.8 (96.40) (0.01) (3.59) 15001 - 25000 19003 125.5 1105 20233.5 (93..92) (.62) (.46) 25001 - 40000 29652.5 135.8 1524.6 31312.9 (94.-70) (0..43) (4.87) 40001 - 60000 47771 358 2142 50271 (95.03) (0.71) (4.26) 60001 - 100000 68350 1836.9 3025 73212 (93.36) (2.51) (4.13)- 100001 - 150000 110640 1078 5333 117057 (94.52) (0.92) (4.56) 150001 - 25000 144465 10 15000 15947,S (90.58) (0.01) (9.41) 250001 and above 247800 11200 20000 279000 (88.82) (4.01) (7.17) T-CTAL i 33270.2 410 173950 3541965 (93.93) (1.16) (4.91) 54 d1stricts gold and jewellery cznstituted more than 3.5 per cent of the total assets. We looked at the data on the change in assets in the two districts - Surat and Kota. Of the increase in assets, real productive assets constituted 84 per cent. Soth gold and jewellery and financial assets accounted for the balance of 16 per cent. Of the change in the asset holding, while gold and jewellery had a higher share in Surat the financial assests were .higher in Kta disttict. Thus the general picture that emerges is that both gold and jewellery and financial assets constitute only a small portion of the total asaets of the rural households. The importance o f gold and jewellery and financial assets is not the same in all districts, Of the change in asset holding,. gold-, and jewellary and financial assets play a more important role. Even here., the relative importance of gold and jewellery and financial assets is not the same in all the districts. The proportion of financial assets to total assets is generally larger in the higher income groups than in the lower income groups. For example in Surat district, financial assets constituted 0.44 per cent in the smallest asset holding group of less than two acre -whereas in the asset group of 15 acres and above it constituted 1.77 per cent. However, it does- not steadily increase. There are some asset groups in the region of four to seven acres which have a larger proportion of the total assets in the form of financial assets than the highest asset groups. The same can be said about the holding of gold and jewellery as well. The relative importance of gold and jewellery is much higher in the lower income groups than in the higher income groups.. In Kota district in asset groups up to five acres, gold and jewellory is almost six times more important than the financial assets. This is true of Tanjore district as well. Asset Proferences in general We have examined so far ,the preferences for finaicial assets or rural households during the decade 1961-1971. In this section we maki some comments on the p#tern of. asset pr ferences cdf all households. While the demand for financial assots comes from the households and other surplus sectors, the supply depends orn the growth of the financial and non-financial sectors. There are several indices to measure the financial 'maturity' of an economy. The broadest and the most comprehensive indicator of financial growth is the ratio of the value of total financial assets to tha-value of total 56 rial assats known as the Finarncial Inte:rrelations Ratio (FIR). This indicator juxtaposcs thG financial supcrstructure of the country to its real lnfrastructwrG and measures the rolativG intensity of financial relations on a given dato. The FIR can be measurod in flow terms as well., i.a. tha ratio of the total not isuaes o f financial instruments to nat physical capital formation during a pariod. AnathGr indicator of financial growth is the Financial Intrmediation Ratio whic rneasures tho. relative importanem of financial instituticns within the financial structure and indicates roughly the. importance of inddirect financing. The Financial Intzrmediation Ratic is obtained by dividing the issues of ftnancial sector to tha issuGs of ncn-financial sector such as government and corporations. Recent studios have. shown that the Financial Intorrelation Ratio maasured in flow torms has been steadily increasing in India. It has increased from approximately 70 par cent in 1960-61 to 102 per cent in 1971-72. The Financial Intermediation Ratio has also shown a similar rise. Within the In 1961 the total financial issues amounted to Rs.1477' crors. In the same yoar the capital formation in current pric2s was Rs.2123 crores. Thus the financial intarrslation ratio was 69.87 per cent. In 1971-72 the total financial issues amounted to Rs.5897 crores whersas the physical capital formation in current price was Rs.5776 croros thus giv.ing a ratio 102.45 per cent. 2In 1961-62 the Issues of the financial sectors to non-financial sectors armunted to Rs.526.60 crores. The issues af non-financial sectors amcuntad to Rs.1170.20 crores thus giving a financial. intermediation ratio of 44.96 per cent. In 1971-72 the issuos of the financial sector amounted to Rs.2462 crores whareas the issues cf non-financial sector amounted to Rs.3433 crores thus giving the Financial Intarmediation Ratio of 71.77 per cent. 57 financial sector, the commercial banks have also emerged as a dominant institution. In 1961-62 the ratio of the issues of the the, commercial banks to the issues by/entire financial structure was approximately 20 per cent. In 1971-72 it was 44 per cent. A good indicator of the asset preferences of the households is the ratio of financial assets to physical assets .in. the composition of household savings. Household savings are trea.ted as equal to tho change in the holdings of physical assets and financial assets including currency. One would expect the composition af household savings to be dominated by financial assets as indirect financing keeps increasing. In most countris- with the developed financial structure more than 75 per cent of household savings is hold as financial assets. Our ability to draw meaningful conclusions based on such a concept has been rendered difficult bacause of the conflicting set o f data provided by the Central -Statistical Organisation and tho Reserve Bank of India.' Table 1..24 provides the data as per the CSO estimates and Table 1.25 provides the data as per the Reserve Sank of India estimates.. Looking at the data provided by the Central Statisticai Organisation, it is seen that nearly half of the savings of the household sector is still being held in the form of physical assets. In fact the data show a rise in the proportion of savings held in. the form of physical assbts. 58 TASLE 1.24 : PHYSICAL AND FINANCIAL ASSETS IN HOUSEHOLD SAVINGS IN CURRENT PRICES (CSO DATA) (Ra. in crrs) Ysar Physical Net financial Household assets as.sets savings 1960-61 445 456 901 (49.3) (50.7) 1961-62 294 489 783 (37.4) (62.6) 1962-63 496 499 995 (49.8) (50.2) 1963-64 394 743' 1137 (34.7) (65.3) 1964-65 593 714 1307 (45.4) (54.6) 1965-66 799 1072 1871 (42.7) (57.3) 1966-6.7 1734 8564 2598 (66.7) (33.3) 1967--68 1649 865 2514 (65.6) (34.4) 1966-69 1617 • 795 2412 (67.1) (32.9) 1969-70 2418 919 3337 (72.5) (27.5) 1970-71 2093 1366 3459 (60.5) (39.5) 1971-72 1912 1562 3474 (s5.o) (45.0) 1972-73 2456 2044 4500 (54.6) (45.4) 1973-74 1643 3474 5117 (32.0) (66.0) 1974-75 3373 2295 5660 (59.5) (40.5) Note: Figuras in brackets are percentages to total ar eatgst ca 59 TABLE 1.25 PHYSICAL AND FINANCIAL ASSETS IN HOUSEHOLO SAVINGS IN CURRENT PRICES (RBI 0ATA) (Rs. in crores) Net Physical Total net Year financial assets housohold assats savings 1968-69 787.2 990.8 1778 (44.3) (55.7) 1969-70 835.2 1018.8 1854 (45.1) (54.9) 1970-71 1328.3 1167..7 2496 (53.2) (46.8) 1971-72. 1623.3 1542.7 3166 (51.3) (48.7) 1972-73 2551.0 1306.0 3857 (66.1) (33.9) 1973-74 2927.0 1622.0 4549 (64.3) (35.7) 1974-75 2881.0 1984.0 ~4865 (59.2) (40.8) 1975-76 3743.0 2043.0 5786 (64.6) (35.4) Note: Figures in brackets arg percentages to total TAaLE 1.26 : NET SANK DEPOSITS ANO FINANCIAL ASSETS IN HOUSEHJLO SAVINGS (CSO OATA) (Rs. In craras) Ratio of nat Net . Financial deposits to Yca • daposits assta financial assets 1960-61 11 456 0.024 1961-62 103 489 0.21 1962-63 70 499 0.14 1963-64 118 743 0.15 1964-65 253 714 0.35 1965-66 309 1672 0.29 1966-67 337 864 0,39 1967-68 268 865 0.31 196-69 72 795 0.09 1969-70 85 919 0.09 1970-71 265 ' 1366 0.19 1971-72 571 1562 0.37 1972-73 706 2044 0.34 1973-74 1141 3474 0.33 1974-75 935 2295 0.41 Source i Central Statistical Organisation, National Account Statistics 1960-61 to 1974-75 During a period of rising prices -hysical assets beiome more attractive than the financial assets which yield fixed income. However, the ratio of physical assets to financial assets in the composition of household savings as given by the Central Statistical Organization is not closely correlated to price changes even though there is rise in the proportion since 1966-67. On the other hand, the data provided by the Reserve Bank of India indicate a steady rise in the ratio of financial assets to physical assets. There is no indication from the R8I data that the rise in the general price level has had any impact on the composition of household savings. The net financial assets as a proportion of total household savings has maintained more or less a steady rise. Net financial assets equal gross financial assets less borrowings. Since borrowings help to increase the creation of physical assets, it may well be argued that the proper measure for assessing the deepening of the financial structure is the ratio of increase in gross financial assets to net household savings. This ratio has varied between 74 per cent and 84 per cent during the years 1970-71 to 1975-76 according, to the R81 data. Thus a significant proportion of the savings is now being channeled through financial assets. Both the CSO data and the RBI data confirm that bank deposits constitute a significant proportion of the total financial assets. In Table 1.26 we have given the CSO data on total net deposits and the total financial assets held by the household sector. Even though there is some sharp changes in a feu years, a steady rise in the ratio of net deposits to total financial assets is clearly seen. Thus the preferences of the households in genral for bank deposits comes out quite well from these data. 62 Thus a datailed examinntion o f the data throw(, up by·the All-India Gebt and rnvestment Survey shows that bctween 1961 and 1971 the propor- tion of financial assots to the total assets of the rural households showed only a small increaso. The small rola played by financial assets in the total asset holding is also con fired by the various surveys conducted by the Agro-eccnomic Resaarch Contras, Howevar, the aggregate data providad by the Rserve Snk of India on thu composition of savings of all households indicate that both the proportion of financial assits to physical assats and the proportion of bank deposits to total financial assats are increesing. IMPACT oF INTEREST RATE In the task of mobil.ising dåposits, ona oF the questions frequently ralsed is the role d f interGst rata. In this section we examina the interest sensitivity of bank- deposits. The importance of understanding the impact of interest reta an diposits arises from the fact that Intaråst rate is a policy variableG~that is subject to manipulation by the mnonetary authorities. Tha rola of i htest rato in the .econory, however, is mora coniplax. The rates which b aks and other financial institutions a=e allowed to pay on deposits from public will have a bearing on thö-rate at which they land.to their borrooers. Therefor3,. tha policy-makurs whllc deciding on thG ratas tc bG of fered on deposits have to take into account tho retas at which the banks have to land. A higher intarest rata offered on deposits will in tur.n imply a higher interest rate on the loans. However, policy-makers cannot completely ignore the depositors' preference pattern. A variety of econometric studies done in the past have shown that deposits do respond to changes,ini interest rates. These studies have also shown that the most dominant influence on deposit holding is income. Level and Structure of Interest Rate It would be incorrect to treat the interest rate offered on deposits or for that matter the interest rates charged on the loans by the banks as a kind of a price that clears the market. The central banking authority virtually determines the interest rate offered on all types of deposits. It also operates with a ceiling on lending rates. Thus, the level and the structure of the interest rates.are very much the consequence of the decisions of the policy-makers. The rates are, therefore, tied to the bank rate only in a loose way. For example, in March 1978 there was a downward readjustment of all the interest rates, even though the bank rate remained at the old level. The Indian monetary authori- ties have operated more or less a low interest rate policy for a fairly long period. While interest rates have risen over a period of time, there were no sharp increases until very recently. We have provided in Table 1.27 interest rates on deposits of different 64 TASLE 1.27 : INTLREST RATES ON DEPOSITS OFFERED BY MAJOR SCDULED COMMERCIAL SANKS SINCE NOVEMSER 1960 (Rate per cent per annum) FLxed deposits onth Sank Sav:ings 181 days 1 year, 2 years 3 yaars 5 years ratz deposits to to to to to 1 year 2 years 3 years 4 years 6 years November 1960 4 2.5 3¾ 4 4 4¾i 44 April 1961 4 3 4 4½ 4½ 4½ 5 April 1963 4½ 3 4 4½ 4i. 4½ 5 November 1964. 5 3 5 . 5 Sb 6 February 1965 6 4 . 6 6½ 6+ 7½ 7½ Junc 1967 4. 5½ 6 6 6½ 7 March 1968 5 3½ s 5½. 5i 6 . ½ April 1970 .5 3½ 5 5½ 6 6½ January 1971 6 4 5¾ 6 64 7 74 April 1974 7 5 .6- 1¾ 7½ 71 8* July 1974 9 .5 7 8 8 9 10* June 1977 9 3 5 6 .6 6 10* March 1978 9 4½ 5 6 6 7½ 9* * over five years * with cheque facility 3 without cheque facil-ity 55 maturities for the perl,od since 1960. For example, the interest rate on deposit up to one yeari stood at'2.45 per cent in 1953 and in 1963 it stood at four per cent. Further the range in interest rates among deposits of varying maturity was very narrow.. In 1960 the interest rate offered 6n. saving deposits on. which cheques could also be drawn was two and a -half per cent and the interest rate offered on term deposits of seven. years was four and. a half per cent. A.sharp rise int interest rate occurred in -3uly 1974 when the rates of intere.st on longer term deposits were substan- tially raised. In April 1974 the interest rate offered on five- year deposit was eight per cent and it was increasad to 10 per cent irr July 1974. The difference between inte'rest rates affered on savings deposits and the longer-term .deposits was also -widened to five per cent. Thus, while some attempt has been made to raise the general level of interest rates offered on deposits after 1971, it is not in anyway comparable to the kind of high interest policy followed by Taiwan and South Korea. There was no attempt to keep the real rates of interest, that is, the nominal rate of interest less the rate of change in the price level as positive. In many years, the real rate of interest was negative. The most recent changes have tried to lower the interest rate structure from the level to which it was raised in 3uly 1974. 66 Factors influencing the holding of Oeoosits A major factor determining the demand for any financial asset is income. This will be so on the application of the general theory of consumer, behaviour. . But in treating the stock of financial. assets rather than the services flowing from them as a function of income, we -have to make the assumption 'of a fixed relationship between stock of assets and the flow of service from a given stock. :There is, however, an alternative view which treats wealth rather than income as the appropriate variable on the ground that financial assets constituts an abode of savings. The demand for any financial asset such, as bank deposits must also respond positively to the return on itself and negatively to the return on assets considered to be its substitutes. The strength of this influence depends on the portfolio choices perceived" by the deposit holders. Households and others may continue to hold financial assets even when ,the nominal rate o f return does not keep pace wit. the increase in price level if in the perception of households physical assets are not a substitute for financial assets. Households and others may also prefer to hold one type of financial asset like bank deposits if other financial assets are not available or are not considered to be appropriate substitutes. If the preference of the households for liquid and safe financial assets is strong, their holding of bank deposits may not be 67 influeoced by the changes in the rates of interest offered on alternative financial .assets. There are sofs of the hypotheses that we have tried to examine in the- light of the data available on bank deposits in India. Bank Deposits and Physical essets There are no strong indications to show..a declining interest in financial assets during a period of rising prices. At lbast the Reserve Bank data show a rise in the proportion of savings held in the form of financial assets (Tabla :1.25). Between 1969-70 and 1975-76, fixed deposits with the: commercial banks grew at an average'annual rate of 18.7"per cent. But between 1960-61 and 1968-69, when the price -rise was not as marked as in the latter period, fixed deposits grew at an annual. rate of 14.7 p-ar cent. Nominal national income grew at ain annual rate of 9.6 per cent between 1960-61 and 1968-69 and at the rate of 11.4 per cent between 1969-;70 and 1975-76. One is, therefore, inclined to draw the conclusion that from the point of view of the depositors, there is not a high degree of substitution between bank deposits and physical assets. The relationship between fixed deposits in real terms and' real rate of interest defined as the nominal rate of interest less rate of change in price level is not found to be significant as car. be seen from thd follcwing equation: Real F:ixed Deposita = - 2241.37 + 0.221Yd - 14.331R (8..11) (1.29) .849 where Yd = Net national product at fact cost in constant prices R= Rate of interest on fixed deposits of five years minus the rate of change in price level The sign of the coefficient for the real rate of interest less the rata of change in wholes-alo price index is negativc3. But the coefficient itself is not significant.. Howaver, an analysis of tho rata of growth o f fixed deposits in recent years indicatas that a sharp increase in price level may have had some dampening effect on the rate of grcwth of time deposits. We have shown in Table 1.28. te.rate of growth in national income, the rate of change in wh.liesale price index and the growth rate in 'time deposics for the five years beginning 1971-72. The years 1973-74. and 1974-75 1itnessed an increase in the price level of the order of 22. to. 25 per cent. During these years the rate of growth in time deposits fell from the normal rate of 22 per cent to around 18 per cent. However, taking a-ll the factors into account one does not sea a s.trong substitution effect between fixed deposits lAn alternative formulation where real .fixed deposits were regressed on national income, råte of change in price level and the nominal rate of interest showad a positive (but not significant) coefficient for rate o f change in price level. 69 TABLE 1.28 : GROfTH RATES'Il NATIONAL INCOME, .PRICE LEVEL AND TIME OEPOSITS Growth. rate Rate of change Growt.h rate in national iii tho wholesala .in time ancome.rrat price index doposits current prices - 1971-72 6.7 5.6 22.3. 1972-73 10.0 10.0 22..7 1973-74 25.0 20.2 17.6 1974-75 17.7 25.2 18.9 1975-76 2.0 -11.1 22.5 . .. . .. .. . .. .. . .. .. . .. . .. .. . .. .. . .............. 70 and real goods. The need to koop the nominal rate of interest in step with the change in price level in ordor to attract deposits does not appear to be necessary in tho Indian context. Bank Oecosits and other Financial Assets In comparing the rates of return on bank deposits with other assets, we need to take into account two related points. First, deposits in the savings account serve the function of transaction balances as well. Holdrs of these accounts are allowed to draw up to a maximum of 50 cheques in six months and this should satisfy the requirements of most individuals. Second, the income earned. on deposits enjoy csrtairi tax concessions. Under the Indian Income Tax Act, interest earned on bank deposits and a few oter notified. forms of investments, up to an amount of AS.5,000 is exempt from income tax. The impact of income tax concession will not be relevant in terms of alternative assets which are entitled to the same type of concession. Eut while ,comparing the returns on other assets one must take into account this impact. For example,. in the case o f a depositor who is also an income tax assessee and whose marginal tax rate is 30 per cent, if he gets retrn of six per cent on his deposits, it implies that on investments which do not attract such concession, he should get 71 8.7 pez cent. It is obvious that the impact of the concession changes depending on the tax bracket to which the depositor belongs. 2 The average rate of return offered on bank deposits has been steadily rising. There was a sharp upward revision as indicated earlier in the interest rates in the middle of 1974 particularly on-daposits with longer term maturities. Inv.estment in shares could.not have been a strong substitute for bank deposits as the in return .of equities has not been rising. Even/1973-74, the yield 2 There are no data available to clearly indicatle how many of the depositholders are influenced ty this tax concession. In 1974-75 the total number of individual income tax assessees was 20 lakhs. The average rate,of interest paid on bank deposits by one of the leading-banks in that year was six per cent. If the average pre-tax return desired is nine per cent, this would mean that only those who fall in tho marginal tax bracket-of 30 per cent would find it worthwhile to inv'est in bank deposits,, since a pre-tax-return of nine per cent will be equivalent to tax free retur.. of six per cent. If from the total of 20 likhs assessees in 1974-75 we excluded those assessees who fall-in less than 30 per cent tax bracket, we get a total of two lakhs assessees. Or alternativoly it can be arguod that to get an-income of Rs.3,000 at six par cent, the total investment in deposits needed will be Rs.50,000. Perhaps, this is beyond the rfeans of people who earn an overall income of more than Rs.25,000 at which level the tax bracket is 30 per cent. If all of them had claimed.the maximum concession of Rs.3,000 per 'hoad available at that time, then the total amount of deposits. that would have attracted income tax concession assuming a ieturn of six pqr cent would be Rs.1,000 crares. The total amount of bank deposits ih savings and fixed deposit accounts as at the end of December 1975 was Rs.11,100 crares. From our calcuilations onecould argue that the total amount of deposits ,attracted because of income tax concession may not be quite large. 72 TASLE 1.29 R fETURN ON FIXED CEPOSITS ANC EQUITIE5 Rate a f Y1e Id on intarøst on variable YGar fixed deposit dividend o f rive yaars industrial and above socurities 1960-61 4.5 4.88 1961-62 5.0 4.67 1962-6:ý 5.0 4.5 1963-64 5.0 4.90 1964-65 6.0 6.96 j965-66 7.25 5.11 1966-67 7.25 7.71 1967-6a 7.0 . a.22 196a-69 6.5 6.81 1969-70 6.5 5.76 1970-71 6.75 5.50 1971-72 7.5 6.99 1972-73' 7.5 6.79 1973-74 5.0 6.22 Sourco* Raserve Sank of India bullatins 1 on variable dividend industrial securities was 6.22 pr cent compared with eight per cent rate of interest on fixed deposits u? five years and above (Table 1.29)-. Obviously there are shares whose yields are higher than the return on deposits. However, these are limited and there is such a rush on them that the yield taking into account the market value of the shares is quite low. In this context it will be interesting to examine the deposits attracted by the non-banking corporate sector. The Companies Act allows non-banking companies to attract deposits from the public subject tol certain conditions laid down by them.. Table 1.30 shows the outstanding deposits with, all the scheduled commercial banks and also with the non-banking corporate sector for the period 1965 to 1974. It is seen that aggregate deposits of companies in the non-banking corporate sector (which icludes non-financial companies as well as financial companies such as hire purchases financial companies) constituted only 10.1 per cent of the total dep6sits held by scheduled banks. The rates of increase in these two:types of deposits have been more or less of the same order in several years. However, in 1974, the deposit:s with non-banking companies increased by 37.5 per cent as against 17.2 per cent of the deposits with the scheduled -commerdial banks. 二 75 With the sharp increase in the price level in 1974, the monetary authorities brought into full operation a policy of f restrictive credit policy. In 1975, when the tight policy began to bita3, the corporate sector started to attract funds through public deposits, A vary large numbez of companies came into the market inviting such deposits. Ono study has documented the rates of interest offered an different maturities during the period. At- a time when banks were offering seven per cant on one-year deposits,, most companise.were willing to offer anywhere between IG to 15 per c nt (Table 1.31). An analysis of the nature of the companies indicated that while companies which have boan consistently paying dividend were willing c offer 11 per cent an one-year doposits7.,ccmpanies which had not paid any dividend in the previous three years were willing to offer 13.5 per cent for one year. Tht s, the risk premium appears to be of the order of two and a half per cent, We do not have as yet data regarding the amount of deposits collected by the compan16s-dUrir1g this period. These data would have-provided us some,clue an the interest sensitivity of deposit holding public. Howeve *, Soth frorirths. point of view of making monetary policy affectivo and"alm tq ensure the safety of depoait.s more restrictions have been imposed ........... 76 TABLE 1.31 : 0ISTRISUTION OF COMPANIES ACCOROINC TO INTEREST RÅTES OPENED ON OEPOSITS Intarest .Maturity for offered on One Two Three Four Five deposits year years years ymars years 7 to 9 14 15 1 - 1c to 11½ 27 - 13 4 3 12 to 13½· 58 70 34 14 16 14 to1 10 20 42 11 15 16 to 17 - 1 10 1 2 TOTAL number of companlas 109 115 100 30 36 Source:* S, Sengupta, "Company Doposits - Caveat Emptor," Tho Economic Tims. Juno 3, 1975 77 an companies in attracting. public deposits The cost to the corporate sector has also been increased.by disallowing a part of interest paid as tax deductable expenscs. The high interest offored on deposits invited by non-banking companies is an indication that a segment of- the population is influonced by interest rate differential. But the quantitative significance of this still cannot.be much because of the risk premium and also the quantitative restrictions imposed,:an the amount of deposits to be attracted by non-banking companies. It may also be noted that while there may be a competitive relationship between deposits attracted by non-banking companies and fixed deposits of banks, there can be a cprplementary.1... . rolationship between the deposits of non-baiking companies and the current deposits of banks. Part of tho deposits attracted by the compani%s could well'be placed with the banks on current account 'a transaction balances. 3The Report on Cirrency and Finance for 197S-76 said : "As stated in the last yearts %port, the r.ecommendations, of the Study Grop on,Non-Banking Companies had been accepted-in principle by the Reserve Bank and the. Government of India, The broad approach of the Group in tha case of non-financial companies has been that the acceptance.cf-depQsits by such companies ma 'not be prohibited altogether but the measures wouad be, so designed as.to ensure the efficacy of monetary policy- and to avoid disruption of the productive process consistent with the need to safeguard, to the extent possible, the depositors' interest. At the same time, the ultimate objective should be to discourage further growth of these deposits and to roll them back gradually so that they would cease to be significant source of finance for industry and trade. 78 The units.of Unit Trust of India also enjoy income tax concession. The annual accretions to the funds of UTI until recently have varied between Rs.70 crores and Rs.35 crorea. During 1977-78 the total addition to the investible fund of the Unit Trust is reported to be about Rs.73 crores. The dividend rate during the. last six years have varied between 8.5 per cent and 9 per cent. However, the yield rate taking into account the sale price works out to an an average eight per cent. The total quantum of funds attracted by the Unit Trust even an an incre- mental basis is so small as to bear any comparison with the fixed deposits attracted by the banks. Other indicators of Sensitivity to Interest Rate Arr analysis of'tho maturity-wise distribution of bank deposits clearly indicates that depositors are sensitive to changes in interest rates. While it is difficult to establish whether tie abs6lute amount held is influenced by interest rata variations-, there is unmistakable evidence ;egarding the shift among term, deposits of different maturities when relative rates of interest have changed. In Table 1.32 we have provided the data on the maturity classification of fixed deposits dp the, sched4led commercial banks for, the years 1969 to 1972 and 1975. 79- TABLE 1.32 MATURITYWISE DISTRIBUTION aF FIXED OEPOSITS OF THE BANKING SYSTEM AS ON MARCH 31 (Percentage. to total) Period of maturity 1969 1970 1971 1972 1975 6 months or lass 20.2. 16.9 15..1 12.5 8.2 More than 6 months but up to 1 yGar 39.1 37.8 33.9 32.0 6.0 Mora than 1 yeaz but up to 2 yeavs 8.8 11.7 14.4 14.8. 26.3 Mor than 2 years but.up to 3 years 5.3 6.0 8.5 7.4 17.9 More than 3 ycars but up to 5 yoars 20.4 20.6 18.0 19.9 .14.2 Above 5 ycars 6.2 7;G 10.1 13,4 27,4 sourco Statistical tables relating to banks in India, 1975 Raserve.Bank of India. We had earlier given in Table 1.27 the interest rate structure for the period 1960 to 1978. In 1969 deposits above five years constituted only 6.2 per cent of the total fixed deposits. At that time the interest rate offered on five-year deposits was 6.S per cent compared with a rate of five per cant on one-year deposits. Naturally one finds that bulk of the fixed deposits was held. in maturities of one-year and less.. Some attempts were made.in 1970 and 1971 to widen the differential between one-year deposits arid five-year deposits by + to 4 a per cent. As a result in 1972, the proportion of the deposits held in maturities above filje years showed a slight rise over the 1969 level. However, in 1974 when the interest rate structure was revisad, the diffarential between short and long was very much widened. In July 1974, the rate of interest offered on one.-year deposit was seven per cent and that o ffered on five-years 'and above was 10 per cent. As the data for 1975 indicate that the proportion five-year depos5its showed a sharp jump and constituted almost 27 per ctnt of the total fixed deposits. rhe one-year deposits which constituted not 1.ess than one-third of the total deposits until 1972 came down to six per cent of the total deposits in 1975. Thus the sensitivity to interest rate changes is clearly seen from these data. Figures on deposits of different maturities on a consolidated basis are not available beyond 1975. However, 81 We have gathered data for the yoars 1976 and 1977 from some of the banks. These are given in 'Tab d 1.3, If we look at the four banks for which we have data, it is clear that the shift towards maturities which offer higher returns is very clear. In all the three banks more than 40 pe,r ceit of the total *fixed deposits are now held in maturities of five years and above. It is also interesting to note that the next most desired form of maturity is one-year to two-year," in all the banks. Because it is at this point, the rate is highest at the short term end. It is also seen that since there is rio diffirence on the rate of interest offered on two-years and three-years, deposits between two-years and three-years is the smallest. All of these indicate that dapo'sitors are sensitive to changes in interest rates. In June 1977, an attempt was made to lower the rates offered on short term maturities while keeping at the old level the interest rate offered 6n deposits. of five-oyears and above, At that time the rates on one to two-year deposits were lowered from eight per cent to six per cent. We do not have the data to find out if this modification led to a decline in the percentage of deposits held in short term maturities. 02 TABLE 1.33 : MATURITYWISE DISTrITBUTION OF FIXED DEPOSITS (Percentage to total.) Perlod Bank A Bank B hank C Bankd 0 March 76 March 77 March 75 March 77 March 77 March 77 Less than 6 months 4.20 3.34 Fi.73 12.03 7.11 9.00 6 months to 1 year 3.39 3.56 2.06 2.92 4.33 5.00 1 year to 2 yeara 31.41 26.54 50.45* 26.03 24.30 20.40 2 years to 3 yeara 7.94 3.ß1 3.22 4.15 7.3 3 yeara to 5 years 16.62 14.45 13.62 11.46 14.25 11.0 Above 5 years 36.36 48.30 27.34 42.70 45.06. 30.5 1 to 3 yeare Comoosition a f' Sank' Dicosits "nd interost Rate Snsitivitv The Indian, banks attract three typas of deposits.: current, savings and fixed. No interest is normally paid on current deposits and these are accounts on which cheques are drawn freely. Saviags deposits aro held predominantly by individuals and as mentioned in a' different context, a limitad amount of cheque facility is also provided in relation to, these accounts. Interest is paid on the basis of minimum balance held during a particular period in each month.' Fixed deposits are term deposits and,are' held for specified periods. There have been many variations in recent years on these types of accounts. Interest rate allowed varias. according to the maturity of the deposits. In classifying deposits as demand and time, a part of the depos-'s held on savings account is treated as. domand and the balance as time deposits..- The proportion is based on the extent of cheque,facility allowed-in relation to these accounts. Currently-almost 85 per cent of the deposits held in savings account are treated as demand deposits. In the .Indian context, one findy a strong preference: for time deposits. Of the total deposits, time deposits have consistently been\ . higher than demand ddposits since 1957-58. The ratio of time deposits to demand, deposits declined between 1959 and 1967. But thereafter it has-. steadily increased and as at the end of 1975, the: time deposits 84 TASLE 1 4 : TIME OEPOITS ANO CEJ%NQ CEPOSI5S IV" ALL SCHEDULED COMMER CIA L S ANKS (Rs. in crores) Ratio o f Time Demand time deposits deposits deposits to demand deposits 1951-52 280 541 0.52 1952-53 309 521 0.59 1953-54 325 521 0.62 1954-55 375 567 0.66 1955-56 412 630 O.ls 1956-57 471 703 0.98 1957-58 720 730 0.98 1958-59 912 722 1.26 1959-60 1,120 781 1,43 1960-61 1,026 719 1.43 1961-62 1,133 788 1.44 1962-63 1,.175 867 1.36 1963-64 1,214 1,071 1.13 1964-65 1,314 1,239 1.06 1965-66 1,522 1,426 1.07 1966-67 1,775 1,648 1.08 1967-68 -2,011 1,844 1.09 1968-69 2,404 1,934 1.24 1969-70 2,793 2,234 1.25 1970-71 3,280 2,626 1.25 1971-72 3,979 3,126 1.27 1972-73 4,848 3,794 1.28' 1973-74 5,830 , 4,336 1.34 1974-75 6,864 4,962 1.38 1975-76 8,279 5,743 1.44 ource: Resarve Bank of India bullatins 8s were 1.44 times that of demand deposits (Tabla 1.34). To some extent the rise in ratio may be explained by the increase in the rates of interest on time deposits even though year-to-year changes in ratios are not adequately explained by interest rate variations. Uith the changes made in June 1977 and March 1978, the interest rate structure has come down by at least one percentage point on all maturities. There has hen a decline in the rate of growth of time deposits in 1977-78 as compared with 1976-77* Nevertheless, the ratio of time deposits to demand deposits has increased from 1.52 at the and of March 1977 to. at 1,55 in March 1978, as demand deposits have also grown/a slower rate. Between March 31, 1973 and June 10, 1978 time deposits increased by 3.5 per cent whereas during the corresponding period in 1977 they rose by 8.1 per cent. Thus there has been a notice- able decline in the rate of growth of time deposits recently. It has to be seen whether this is .a temporary phenomeron or not. Statistical Analysis of Sensitivity We have tried to analyse the impact of the two factors, income and interest rate on the various typos of deposits' by estimating appropriate equations. We have tried to estimate 4In an equation estimated by regressing the ratio of time deposits to demand deposits on interest rate, ths coefficiont for interest rate turns out to be negative though not significant. of the Lihaviour of each type/doposit separately bzcause there is always :a possibility of substitution betwoon ona type of deposit and another. hen the rates on fixed deposits rise, there is a possibility of a shift from savings deposits to fixed deposits, Similarly a rise in the intarest rate on savings deposits can cause a shift from demand deposits to savings deposits. Ay type of deposit should respond positively to a rise on its own rate and negatively to the interest rate on alternative types. However, it is statistically somewhat difficult to isolate these influences because most interest rates are altered more or lass at the sane time. This gives rise to the problem of multi- collinearity.. .Also the interest rate structure is altered at periodic intervals so that these interest rates do not change from year-to-year. As indicated earlier, we would expect to find income to be an important influence on deposit holding. The sensitivity to interest will largely depend upon the portfolio preference pattern of the deposit holders. In this context the ownership pattern of various kinds of deposits may have a significant bearing. However, we do not have a continuous timo series on deposits held by different categories of holders. Surveys are conducted by the Resorve Bank every five years to get an idea of the ownership pattern. \e have presented in Table. 135 the relevant data. 87 TABLE 1.35 ; OWNERSHIP OF OEPOSITS WITH SCHEDULED COMMERCIAL 8ANKS - 1956-1972 (in percentages) As on Dec 31 April 28 March 31 March 31 March 31 March 31 1956 1961 1966 1970 1971 1972 A. CURRENT DEPOSITS 1. Business 49 54.7 55.3 56.2 54.6 55.4 2. Personal 26.5 23.8 19.2 19.2 19.9 18.5 (Individual) 3. Professionals - - 1.4 3.6 4'.1 3..6 4. Government and Quasi-Govern- 11.6 6.7 10.2 6.3 6.9 7.9 ment bodies 5. Othors~ 12.8 14.8 13.9 14.7 14..5 14.6 8. SAVINGS CEPOSITS 1. Personal 96.9 97.0 95.7 91.3 91.1 98.5 (Individual) 2. Professional - - 0.9 5.7 6.1 6.5 3. Others 3.1 3.0- 3.4 3.0 2.S 3.2 C. FIXED DEPOSITE 1. Business 22.2 28.7 20'6 17.5 17.6 16.0 2. Pèrsonal 55.2 48.7. 56.9 54.7 53.6 53.2 (Individual) 3. Professionals - 1.1 2.7 3.8 2.3 4. Governmont and 13.8 10.7 9.0 9.2 8.6 9.8 Quasi. bodies 5. Others 8.8 12.0 12.4 15.9 17.4 18.7 Source: Statistical table relating to banks in India, 1973 88 In the casa of current deposi.ts approximatoly 55 per cent of the doposita aro held by business. Ovcr tho decade 1961-71, there appears to have been no change in the share held by business. The savings deposits are'almost exclusively held by individuals. In the case of fixod deposits, individuals hold abcut 54 per cent of the deposits and the rest are held by business and other institutions. One would exp'ct to find a strong influence af Interest rat on fixed deposits because a significant part of it is being held by institutio'ns and business which might be mora sensitive to changes in intarest rate because of their greater awarenoss of alternative uses. Using the observations for the period .1960-61 to 1973-74, we estimated the' following equations. All the variables have been taken in, nominal terms. Current Ooposits.= - 169.99 + 0.059464Y -66.524i (-1.3095) (12.0054) (-1.08784) 2 = 965• Savings Deposits = - 478.989 + 0.071776Y + 107.94115 - 157.469i64 (-2.294) (1'3.303) • -1.036) (0.626) = 972 FLxed Deposits = - 1283.84 + 0..1.26127Y + 201.394i5 - 171.267Y (-2.223) (6.337) (0,754) (-1·.145) 2= .961 Fixed Oeposits = -1126,31 + 0.126465Y + 155.688i5 - 163.524Yis- 10.86384 AP/P -1.758) (6.1'70) (0.594) (-.5) (0.661) where Y = National income at current prices = Rate of interest. on savings deposits = Rate of'interest an fixed deposits of five years or more .6M = Rate of interest on fixed deposits of six months Ys = Yiold on variable. (total) dividend industrial securities AP/P = Rate of inflation From the equation relating to current deposits, it can be seen that these deposits are strongly influenced by changes in national income. The marginal current deposit-income ratio is six per cent. Since savings deposits were considered as an alternative to demand deposits, the rate of interest on savings deposits was introduced as a variable in the equation. However, since the rate' on savings deposits also moves along with the other rates, the introduction of this rate can be treated as a proxy for opportunity foregone. The coefficient of the interest rate on savings deposits has a negative sign even though it is not statistically significant. The strong influence of income is again seen an savings deposits. -The marginal savings deposits-incoma ratio is seven per cent. Those deposits respond positively to their own rate so . of. intarest and negat.ively to the interest on six-montb deposits. We introduced the interest rate on fixed deposits of six-month maturity to take cars of substitution effect. It must, however, be noted that even though the coeffici&nts for the interest rate variables are of the expected sign, they are not statistically significant. But there.have been other studies dealing uith different time periods where the interest. rate coo fficients have been fgund to be statistically significant also, An increase of one per cent in interest rate on savings deposits brings about an increase an savings deposits of Rs.108 crores. The equation relating to fixed deposits again shows that the dominant influence is income. The coefficient for income is .13. Fixed deposits respond positively to changes in their own interest rate and negatively to the yield on variable dividend industrial securities which was treated as an.altarnative. The coefficients, however, are not statistically significant. But in the double log formulation, the interest rate and yield coefficients. are statistically significant at 10 per cent confidence level. Theoretically speaking, in the fixed deposit equation besides its own rate of interest the rate of interest on savings deposits, yield on -equities and the change in price level should have been introducea to take care of all the;:substi-twt.ion effects, But. equations estimated with all these variables arp not satisfactory. The coefficient for the rate of c4ange!. irr.prire level furns out to be pcsitive though not statistically significant. Far all deposits. taken together, the marginal deposit- income ratio comas to .26. *The income elasticity for the various types of deposits, as can be seen from the double log formulation, varies from 1.27 to 1.64. An increase by one percentage point on all rates of interest seems to rosult in an incroaso in deposits by Rs..S craors. . From a variety of factors that we have examined the faIlowing conclusions secmi.to emerge: Real goods do nat- appear to .be substitutes for fixed deposits in.banks.; Even during periods when prices have boen increasing at very high ratas, fixed. deposits have tended to grow at reasonably high rates. Households and others appeav to be influenced more by the nominal rates of interest than real rates of interest. 92 The degrao of substitution between deposits in commercial banks and other financial assets also appears to be weak. This is partly due to the fact that tho returns on alternative financial assats hava not usually been mora attractive than the returns on fixed deposits. Apart from the tax concessions, households and others soem tj profor bank deposits for the liquidity and security they possess. However, there is evidence to show that the deposit holders do shift from one type of deposit to another type of deposit when relative rates of returns change. This does indicate a degree of interest sensitivity on the part of the deposit holders. Nominal income appears to be the most dominant influence on deposit holding. Changes in nominal income account for the bulk of the changes in deposits. Rates of interest even when they are found to have a significant effect on doposit holding are not quantitatively that important. ROLE OF SPECI)L. DEPOSIT SCHEMES As part of the effort to mobilise deposits on a larger scale, banks in India have been introducing a variety of new doposit schemes to suit the noeds of different types of customers. As mentioned previously, Indian banks attract three typos of deposits current, savings and fixed-. It is in relation to fixed deposits that a number of variations has been introduced to satisfy the requiraments uf different classes of savers. In this section, after desc-ribing the salient featubes of the new schemes, we examine their impact on deposit mobilisation. Classification of Schemes In the standard fixed deposit scheme a customer makes a deposit for a -fixed periad, tl. period ranging.. fjrm 15 days to five years and beyond. In such a scheme, interest is paid. periodically and the interest rate varies with the term for which the amount is.deposited. In the previous section we had discussed the maturity compoisition of fixed deposits in the country. The essential characteristic of a fixed deposit scheme is a commitment on the part of the depositor to keep the money with the bank for a period fixed. in advance. From the point of view of portfolio. of management, such fixed deposits are a great help to banks even 94 thougn the interest cost can ocome sizeable. Starting from the essential charactaristic that the amount is set asidG for a fixed period, banks have introduced a variety of modifications to catur to thé needs of different classqs af customers. While the schemcs introduced by individual banks may very in detail, the different the schemes introduced by the banks fall under/following four categories^. 1. .Reinves.tment Schemes.: While in the case of a no.rmal fixed deposit schema, interest is pald periodically, under the reinvest- ment schema, interest is.also allowed to accumulato along with the principal and at the end of a given period the pripcipal and the intorest are paid in one lump sum. Seccuse of the compounding of intarest, the total amount payable at the end of a fixed period looks very impressive. When the rate af interest offered was 10 per cent on term deposits of five years and above, undor the reinvestment scheme if a deposito'r kept his amount for seven years the amount gets doubled because o f the compounding o f *a interest. It can very well be seen that such/scheme appmars particularly attractive to people who want to have a fixed amount at a given point in future in order, to perform tasks such as daughterls marriage, children s education, housing construction, etc. A 'variation of the reinvestment plan is the issue of .cash certifirates; under which ah odd lump sum doposiced matures into az-ound.lump sum after-a specified period. For example currently when the rate of interest`on fixed deposits over five years is. nine per cent, a cash certificate for five years will mean that, for an issue price of Rs.53,63, the valuo at maturity will be Rs.100. The implied rate of interest will be the same as in the reinvestment plamn. 2. Recurring Deposit Scheme: Under this scheme a depositor pays a fixed amount every month for a given period. He collects a lump sum at the end of the period. This kind of a scheme has been envisaged to attract deposits from the sala7ied class. Obviously such a scheme is unsuitable to a class of people whose income is not regular. The principle of compounding is again the basis of this scheme. 3, Pension Plan : In this. schemo a depositor makes a deposit df a fixed.amount every'month for a given period. After the expiry of the poriod, he receives a fixed monthly income for an indefinite period. This is only a slight modification of the recurring deposit scheme. Instead of repaying in one lump sum the antire amount that gets cumulated, the depositor is allowed to draw a monthly income which is equal to interest payable on the 1L.np sum. After a. stipul, _ed period which iz usually a little over five years, the payment of,monthly income can be discontinued and the depositor can receive a consolidated amount. 4. Small Deposit Schemes: Several banks have iptroduced schemes. with a view to collecting deposits of small amounts from small traders, wage earners and low income households. The essential feature of these schemes is that the banks appoint commission agents or deposit collectors who go to the homes of these people. and collect the deposits. Most often banks supply the depositors with a money-box in which the depositors put in their small savings. The amounts so deposited are collected by the commission agents once a month and they are transferred to a special account in. the name of the depositor. These amounts are required to be kept usually for a period of five years. The rato of i.nterest offered on this scheme is comparatively lower. Currently when the ruling rata of intarest on deposits of 63 months is nine per: cent, most banks pay on such deposits six per cent simple interest on the minimum monthly balances kept. The lower interest rate paid is justified on the ground that the attractiveness of the scheme is not the rate of interest but the convenience of operations. No withdr'awals are permitted from these schemes. If the deposit is closed before the completion of five years, simple interest is paid at the rate 'of four per cent (currently) per annum. Commission 97 agents play an important role in this scheme. For securing deposits and collecting them from the account holders, the agent is paid a commission which is usually- about three and a half per cent on the amount collected and deposited. In the case of all the schemes dcscribed an element of liquidity is imparted into them by' providing for loan facilities against security of deposit receipts or in some ca3es alloiLing. even withdrawals be fore maturity. When such withd:awals are allowed, the rates o interost are drastically redu.ced to act as a deterrant. Imoact of the Schemes It is difficult to estimate how far the introduction of the new schemes has resulted i.n additional deposit mobilisation. Data on deposits collected under each of the schemes have not been readily availablo with all banks. Also since these schemes have been introduced in a large way only in the last few years, whatever, data that are available are for a short period.. There is, however, enough evidence to show that those schemes are becoming increasingly popular. 92 TASLE i.6 : RATIO0 G CEP0SITS UNDER DIFFEREW' TYPES OF ACCOUNTS IN 1977 Sank 1 Sank 2 Sank 3 Sank 4 Sank 5 Bank 6 1. Cur:nt deposits to total deposits 14.24 28.93 27.64 14.22 16.04 12.69 2. Savings deposits to total d*posits 21.42 18.35 21.01 18.75 30.35 23.98 3. Fixed dsposits to. total deposits 64.34 52.72 51.35 67.03 53'.61 63.20 4. Special deposit schemes to total deptsIts 13.80 9.74 12.98 25.64 15.54 5.71 5. Speci4a deposit schemos to fixed deposita 21.44 18.48 25.27 38.25 25.99 9.02 I 99• xuo have prosented in Tabe 1.36 the ratio uf depoasits collected under different schumos to total deposits of five different banks. It can be sGen that in all the banks except one (whose total deposits wero around Ra.60 crores) fixGd deposits were at least 50 per cent of the total deposits. The deposits collected under the various new schemes were at least 10 per cent of the total deposits. As c proportion of total fixed deposits, the deposits collected under the spcial schomes ranged between 20 per cent and 40 per cent excGpt in the case of tha smallest bank. Thus it is becoming clear that the spacial .deposit schemes have come to occupy an important place in the total deposit structure. W5 have given in Table 1.37 the figures. relating to the State 'ank of India for three years. The ratio d f special type deposits to total fixed depe-sits has indreased from six per cent in 1975' to 18 per cent in 1977. More interestingly, tha new schemes åra playing a major rolo in the increase in deposits. Between"1975 and 1977, of the total increase in fixed deposits of Re.500 crores, a little more than half of it came from the new deposit schemes. In the case of the State Bank of India, the data clearly indicate that deposits collected under the reinvestment plan have shown a substantial increase. Data collected from other banks also indicate that the reinvestment plans are extremely popular. 100 TASLF. 1.37 : SPECIAL TYPE EP0SITS TO FIXED CEPOSITS IN STATE BANK. OF INOIA (Ra. in cz=r5s) Scheme 1975 1976 1977 1 J ~anata (daily savings) deposits 13 18 20 2. Rmcur=ing deposits 12 26 47 3. Reinvestment plan 77 242 480 4. Fixed deposita 1752 2431 2931 5. (1+2+3) as / af 4 5.8 11.7 18.6 5. a(1+2+3) as % of 1FU 27.1 52.2 Sour.ce. State eank of India balance shaets 101 The attrnctiveness o f the now schemes of deposit mobilisation is also reflectetd in relation to deposits collected in rural areas. W have presented in Table 1,3a the data collected from ane rural branch for four years. Cbviously current accounts on which cheques can be drawn play an insignificant role. In the early years savings deposits constituted one-half of the total deposits and the standard fixed deposits about 40 per cent. The data for the -later years indicate a shift from savings and standard fixed deposits to the special types of scnemes such as re.curring deposits•, cash certificates and reinvestment plans. We'fiaúie been able to gather from one bank data on the distribution of deposits under various schemes for the different population centres for the year 1977-73. These are presented- in Table 1.39 It is. interesting to nota that reinxiestment plans are quitt. populär even in rural, semi-urban and urban areas. However, a in this bank,' tho special deposit schemes appear to play/much mora important*role thah in other banks since they constitute almost half of,the total fixed deposits. An an-alysis of the data provided by another bank also indicatad that the distribution of diffeen -types-of term- däpääIE was the same in metropolitan, urban, semi-Urban and rural centres. 102 TABLE 1.38 : SHARE Or DIFFERE4T TYPES OF CEPOSITS IN A RURAL BRANCH 1973 1974 1975 1976 1,. Cu~rnt a~count i.075 1.Z67 0.442 1.239 2. SavLnga 53,038 50.569 43.694 38.964 3. Minør havings 0,991 1.25 . 0.931 1.309 4. Fixad depasit 39.728 39.220 45.701 38.370 5. Recurring dsposit 4.317 6.469 5.691 5.518 6. Cash. csrtlflcata 1.849 1.420 3.531 5.852 7, Reinvestment plan . 8.746 10:3 TABLE 1.39 : SHARES OF OIFFMÄENT TYPES OF DEPOSITS ACCORDING TO POPULATION CENTRES IN ONE BANK Current Savings Standard Recurring RainvGatment fixed plan Rural 5.51 34.47 23.64 2.17 25.49 Semi-urban 8.09 33.00 26.04 1.98 22.67 Urban 13.84 26.62 26.02 2.07 24.29 Metropolitan 14.09 24,3G 39.83 1.45 17.03- TOTAL 12.35 27.09 33.43 1.72 20.02 TABLE 1.40 DISTRIBUTION OF COLLECTIONS UNDER DAILY DEPOSIT SCHEME IN CIFFERENT'POPULATION*CENTRES .(in pGrcentage) Rurcl Sjmi-urban Urban Metropolitan B8nk 1 12.6 24.31 42.50 20.33 Ba~e z 13.56 30.89 29.67 25.87 ,i 104 Earliar a reference was nade to thp attempts made by banks to collect deposits of small amounts from very low income house- holds on-a daily basis. Not all banks have launched schemes to attract such deposits. However, even in the few banks which have given-special attention to this scheme, the collections yet are very small. The State Sank of India had at the and of December 1977 a total of Rs.20.35 crores. in its Janata Deposit Scheme. This clnstitutes a negligible proportion of the total ceposits of Rs5,630 corazes. However, there were 6.47 lakh accounts under this scheme which implied an average deposit of Ra.300. There are a few banks-where these deposits constitute a much larger proportion of the total deposits. Two banks were able to provide us detailed information on this scheme. In these banks deposits collocted under the daily deposit scheme constituted three to -fuar per- crt of.the .total deposits. We have given in Table 1.40 the distribution of these deposits in different population centres. It is interesting to see that the deposits under this scheme, are quite sizeable even for the rural and semi-kirban areas. There are, however, some disturbing features about the operation of this scheme. Our discussions with some of the bank officials indicated that the lapse ratio is very high. Many depositors after having started the account have been unable to make further contributions. Though firm estimates are not available 105 it is understood that the lapsc ratio may be as high as 60 per cent. This is reflected in certain other,data that are avail- able. One bank has reported that of the total cost incurred on operating these deposits, only 8.48 per cent was accounted for by interest payments. The commission paid to the agents constituted almost 70 per cent. In 'another bank we found that even though the deposits undar the daily 'deposit scheme constituted roughly three per cent of the total deposits, their share in the total interest paid was only 1.z per cent. The cost of such deposits amounted to roughly 7.5 per cent of the deposits and only a little less than half of this went to the depositors in the form of interest. The balance amount went to the agents. The fact that interest payments constitute a,small proportion of the total cost incurred on these deposits quite clearly indicates that the lapse ratio must be high as a much lower rate of interest is paid on accounts closed befire five years. There is, however, a possibility that part of the deposits initially collected from *this scheme could have been transferred to other types of deposits. But this type of diversion cannot be very high. Thus allin all, i appears that while some banks have been successful in collecting deposits in small amounts, they have come from enlarging the number of accounts than by the same account-holders continuing to deposit. If the lapse ratio is really as high as it is reported, these schemes may not be serving the purpose for which they were introduced. SUMMARY In this chapter we have looked at four issues in relation to deposit mobilisation. We examined first the impact o f branch expansion on mobilisation of deposits. Massive branch expansion a has been the most dominant feature of banking development since 1969. The ratio mf bank deposits to national income has shown a sharp rise since 1969. Branch expansion affects deposit growth both directly and indirectly. The. direct effect is seen on the deposits collected in the centres newly opened and the indirect effect is felt on the entire system through such effects as reduction in cash drain. Our analysis of the direct effect indicates that at present the new offices in spite of their large numbers contribute only a small proportion of the total, deposits. However, their share in the increase in deposits is nearly one-third. There is also evidence to indicate that bank deposits tand to grow at a fast rate in the first six years due to their ability to exploit more fully the potential in a place. Therefore the full impact of the offices rewly set up on deposit mobilisation can only be seen after some years. We also examined the impact of the extension of banking on a large scale into rural areas on the asset holding of rural households. We do not have any data as of a recent date on the asset preferences of rural households. EXtansive data are, however, available 107 from the survey done by the Rezerve Bank of India in 1971. A comparison of those data with the data of an earlier survey indicates that over a decade there has not been a marked change among the rural households in the ratio :f financial assets to physical assets held by them. There is some evidence that the importance of bank deposits among- the financial assets may be increasing. An analysis of the composition of the savings of households, both rural and urban, indicate a rising ratio of financial assets to physical.assets. In the case of all house- holds, .the. ratio of bank deposits to total financial assets has definitely shown an increase. The Indian monetary authorities have generally followed a low interest rate policy even' though iv recent years there has been a sharp rise in the interest rate offered on bank deposits. However, there has. been no effort to keep the real rates of interest always positive, Our analysis of different types of data indicate that deposit-holders are sensitive to relative changes in rates of interest. This is clearly reflected in the maturity composition of fixed deposits. As far as total deposits are concernedi nominal income appears to be the strongest influence. 108 The efforts: of the banks to mobilisE larger deposits thr-ugh the introduction of a variety of new schemas seems to have caught the imagination of.the depositors. There has been a definite shift frim standard term deposits to the newer types of deposit schemes. In the case of the largest bank in the country deposits coIlcted under the new schemes have contributed half of the total increase in fixed deposits in recent years. Scme banks haVe been successful'in evolving special schemes to attract deposits of very small income groups. However, our analysis of theso schemes idicates that there is a high lapse ratio in the case o f ruch depo,its. The ability of the small income groups to continue with recurring deposits seems to te limited. Chapter 2 IIIPACT ON CREOIT The distribution of bank credit among the various sectors since 1969 has shown striking changes, as mentioned briefly at the beginning of the previous chapter. At tho time of the bank nationalisation, two major concerns were expressed in relation to the deployment of bank credit. One related to the disparity in the distribution of bank credit among states and the other to the neglect of certain sectors by the banking system. In order to correct the first deficiency, policy-makeis began to monitor the changes in credit-deposit ratios of different states. The second deficiency was sought to be corrected by imposing certain obligations on banks with'respect to providing credit to- certaih specific sectors. The sectors so specified came to be known. as priority sectors. This can be treated as a positive farm of qualitative contiol of credit. In this chapter we first discuss the trends in credit-deposit ratio and their implications. This is followed by a discussion an the changing pattern of credit particularly to small scale industries and to agriculture. Much of the discussion in this chapter proceeds from the assumption that it is desirable to reallocate credit in such a- way- as to encourage the flow of'bank credit in certain hitherto neglected sectors4 Obviously there is sufficient 3conomic 110 justification for this. 7ime and again it has been pqinted out that sectors like agriculture have been dependent too much an non-institutional form of finance with- all the attendant undesir- able consequences. The positive factor in favour of banks as an instrument of providing credit to these sectors is their pro fes- sional competence. However, landing to agriculture or to other priority-sectors such as small scale industries or small businesses is necessarily to small accounts and as we have noted elsewhere, the cost of providing credit is higher in the case of such small accounts. While a bank as a whole might be able to compensate the increased cost on small accounts by the margin they can earn on the larger accounts, rocent discussions on alternative institutions for providing rural credit essentially stem from the cost angle. We have, however, confinad ourselves in this chapt3r to examining the issucs other than cost that arise in providing credit to small scale industries and agriculture. I. CREDIT DEPOSIT RATIO One of the stated objectives at the time of the nationali- sation of the major'banks was to reduce the disparities among states in the provision of bank credit. Uhile introducing the Bill for nationalisation of banks, the Prime Minister observed: 111 "There has been serious imbalance in the development of banking system in different regions of the country.... Analysis of the statewise credit-deposit ratio has shown that it is very low in several states.... This has led to the complaints that the banks mobilised resources in the form 'af deposits in certain areas and utilised them elsewhere, thus aggravating regional' imbalance. These trends can be corrected and the policy of regional develop- ment which has frequently been emphasized can be implemented when banks are under public control.". A more balanced d'istribution of bank credit was to be achieved in two ways. One was7 to expand the banking facility at a faster rate in the relatively under- banked states and the second was to insist upon banks that - a minimum proportion of the deposits collected in an area must be lent in that area. The 'credit-deposit ratio is usually calculated as a proportion of the credit sanctioned by banks in a geographical area such as a state to the deposits collected in that state. The concept of credit.-dposit ratio has a certain relevance in as much. as it provides an index of the involvement of banks in a state. While. the aggregate credit-deposit ratio o.f the banking system is influenced largely by monetary policy, variations in this ratio anorg, states reflect both the involvement of banks and the obsorptive capacity 112 of different states. Howcver, even for the purpose of measuring the extant to which a state has bene fited from bank credit, it is better to take the ratio of bank credit utilised in a state rather than the credit grantad in a state, to· the deposits collected..in that state. It is quite possible that 'bredit gr2nted in a parti- cular state may migrats to some other stata for being utilised thare. There fore in ot analysis whergver the credit-deposit ratio according to utilization is available, we have made use of it. Crdit-Oecosit Rati amono States In Tabla 2.1 wa have prasentad the credit-deposit ratio according to sanction and according to utilisation ror 1973 for all statas. The ^redit-deposit ratio according to sanction for 1969 is alsa pr-sent*d. In 1969, the ratio for the banking system as a whole was 72.1 par cent. In 13 out of 16 states, the ratio was lower than the national average, Fmur states had =redit-deposit ratios which werG higher than 90 per cent. At the other extreme there wers four states whosc crodit-deposit ratio was less than 30 per cent. In 1973, the national average had come down to 70.3 per cent mostly due to additional liquidity requirements imposed on'banks. In 11 cut of the 1 states, the vatio was still lower thart the national aversge. The disparitis have, however, slightly narrowed down as the number zif statas with 113 TABLE 2.1 S .TATEWISE CREDIT-DEPOSIT RATIO As at the @nd uf December 1969 As at theend of December 1973 States/Unton Territuries Crodit- Credit C~redit- Per Capita Per Capiti Per Capita Per Capita Deposits Credit deposit Deposits Crrdit deposit deposit ratio ratio ratio according a'eord- according to sanction Ing to to Utifli- sanction zation Andhra Pradesh 40 37 94.2 88.56 74.11 83.67 92.52 Assam 30 13 42.7 51.4' 21.70 42.18 85.68 Bihar 33 9 27.2 78,22 23.21 29.68 44.57 Gujarat 172 87 50.6 278.02 159.93 57.52 67.84 Haryana 64 30 47.2 139.63 83 5s 69.84 .105.51 Himachal Pradesh 51 11 22.3 167.80 26.37 15.71 11.99 Janmmu & Kashmir 76 9 12,0 150.60 37.35 24.00 25.80 Karnataka 07 63 72.7 157.70 141.39 89.65 94.56 Kerala 78 53 68.7 141.12 99.91 70.00 74.00 Madhya Pradesh 30 . 17 55,8 61.94 32.82 52.99 55.44 Maharashtra 244 224 92.1 431.23 362.2 84.01 78.03 Nagaland 24 2 8.1' 49.81 20.94 42.04 39.77 Orissa 16 8 49.5 33.75 17.61 52.17 72.08 Punjab 170 57 . 33.2- - 33,9. 60 140.39 41.34 41.52 Rajasthan 36 18 49.9 71.22 39.42 55.36 57.62 Tamil rJadu 76 101 133.5 .166.37 176.07 105.83 103.98 Uttar Pradesh 48 22 44.6 95.02 39.57 41.30 46.47 West Dengal 1.61 162 100.6 278,00 227.87 81.96 72.68 TOTAL 94 68 72.1 175.55 123.44 70.32 70.32 * Population calculated as per projection for 1973 - Report on Currency & FInace 1975-76 Vol.I1. ~114 .a ratio of more than 90 per cent had declined from four to one. Even though the coefficient of variation of this- rutio had declined from .59 in 1969 to .42 in 1973, the disparities even as of 1973 wers quite considerable. The high credit-deposit ratio of soma, of the states is accounted for by the fact that they contain the major metropolitan centres. When these cities are taken out, the credit-deposit ratio in all these states fal.s quite steeply. For 1973, we also have the credit-deposit ratio according to util-isation. A comparison of this ratio with the ratio accord- ing to sanction is quita revealing. In the case.of some states such as Assam and Sihar, the ratic changes quita shurply. There is a mors even distribution of the retic according to utilisation than according to sanction. The coefficient of variation af the credit-deposit ratio according to utilisation is .40 as compared with the ratio of .42 for the ratio according to sanction. Credit-Oeposit Rntio amonn Poculatian Centros In Table 2.2 we have presentd the^credit-deposit ratio in different population centres in 1972 and.1974. Quite clearly the ratio is far higher in the metropolitan centres than in the rural areas. As against the national average of .67 in 1972, this ratio was only .48 in the rural centres. In 1974, the rural 115 TABLE 2.2 : CREOIT-EPOSIT RATIO ACCORDING TO POPULATION GROUPS 1972 1974 Population groups All Offices opened All. Offices.opened af fices afte - affices after nationalisation nationalisation Rural 0.477 0.468. .526 .563 Semi-urban 10.419 0.534 .471. .667 Urban 0.571 0.439 .687 .556 Metropolitan- 0.875 0.435 .877 .656 TOTAL 0.671 0.467 .710 .612 116 credit-deposit ratio rose to .63. The overall ratio has also risen from .67 to ..71. Nevertheless, thUre has been a relatively larger in.crease in the rural areas. The credit extended by the rural offices increased from 4.a per cent of the total advances in 1972 to 5.9 per cent in 1974. It is interesting to nota that the credit-dposit ratio af tne branches opened since 1969 show a more balanced distribution of the rn.tio among diffarent population centres. -As at tha end of 1974 it is seen that for the offices opened after nationalisation,' the credit-deposit ratio for rural centres was .56 as compar.d with the ratio of .65. for the metro- politan centres. Perhaps with the growing importance of offices• opened after nationalisation in the total picture, the differences in the ratio amng different population groups may come down in the years to come. However, as of now, there is a transfer of funds from the rural and semi-urban cantres.to metropo.litan centres. It may be noted in this context that only 3.5 pe. cent of the credit granted by the metropolitan centres goes for agri- culture-and allied activitieä. Thare fore the credit from metro- the politan centres for/financing afr rural activities could not have . compensated the transfer of funds from the rural and semi-urban nraas to the metropolitan centres. *If the credit-deposit ratio af the metropolitan centres had been maintained at the national level, the advances made by them in 1974 would have come down by Rs.944 crores. This can be taken as the transfer of funds from the other areas to metropolitan ccntre. Sut approximataly four per cent of the total credit granted by these centres i.e. Rs.180 crores has been for agriculture and allied activities. Thus there has been a net transfer of funds to the metropolitan centres. 117 Credit-Ocoosit Ratio as a Policy Parameter The credit-deposit ratio has acquired the overtones of a policy parameter. Sanks are being called upon to grant as credit at least 60 per cent of the deposits raised in the rural and semi- urban areas in those population centres. The under-bankod states are claiming that the credit-deposit ratio in their states must be raised to a certain minimum level. Prescribing a minimum ratio by itself will not go to help the under-bankod states very much.. Evan if the banks arc required to maintain a higher ratio since the deposit base of those states is usually low, the additional credit that will be made available will be small. In fact a more equitable distribution of bank credit would demand an even much higher ratio. On the other hand, proscribing such a minimum may also adversely affect states which enjoy currontly a higher credit-deposit ratio but whose per capita credit is small. For example, Andhra Pradesh has a credit-deposit ratio of 83 per cent but its per capita credit of Rs.74.11 is still below the national average of Rs.123.44. In the state of Gujarat the credit-deposit ratio aacording to sanction is 57 per cent whereas its per capita credit is Rs.160.,. Therefore the attempt to ensure a more even. distribution of credit-deposit ratio may come in the way of achiev- ing a more even distribution of per capita. bank credit. In fact the policy-makers have to decide whether they want to ensure' a more yen even distribution of bank credit or a more /distribution of the ratio. One could argue that the former has a greater validity than the latter. These considerations are also relevant while examining the credit-deposit ratio in rural and semi-urban areas. With only about eight per cent of the deposits in the rural areas a target ratio like 60 per cent will not result in any considerable flow of credit to rrjral areas. However, in' relation to semi-urban areas which have 23 per cent of total deposits, a rise in the ratio- from 45 per cent to 60 per cent may mean a more substantial flow of credit. One reason given for the low,credit-deposit ratio in certain. states or in certain population centres is the Ick of adequate absorptive capacity in these areas, An analysis of the credit-deposit ratio in rural areas among states (Table 2.3) indicates that this ratio is high in. states where the overall credit-deposit ratio is also high. While this shows that states with adequate infrastructure facilities may be in a position to absorb a larger amount of credit, this does not indicate that the opportunities by themselves are limited. Data on the village adoption scheme by banks indicate that on an average there. were only 26 accounts per village. This at least shos the potential that is available to. the banking system. Therefore insistence 119 TABLE 2.3 : CREDIT-0EPOSIT RATIO IN DIFFERENT POPULATION GROUPS IN STATES (As on the last Fviday of Oecember 1975) State Rural Semi-urban Urban and Total Metropolitan Haryana 0.650 0.542 0.807 0.627 Himachal Pradesh 0.105 0.295 - 0.186 Jammu & Kashmir 0.218 0.431 0.374 0.356 Punjab 0.216 0,342 0.500 0,380 Rajasthan 0.699 0.540 0.597 0.594 Assam 0.193 0.344 0.758 0.451 Bihar 0.768 0.429 0,367 0.443 Orissa 0.357 0.524 0.461 0.469 West Eengal 0.202 0.174 0.833 0.728 Madhya Pradesh 0.542 0.473 0.507 0.500 Uttar Pradesh 0.408 0.363 0.494 0.448 Gujarat 0.249 0.393 0,861 0.609 M~aharashtra 0.793 0.507 0.894 0*859 Andhra Pradesh 1.173 0.717 0.736 0.774 Karnataka 0.890 0.786 11110 11000 Tamil Nadu 1.026 0.721 1,216 10090 Source: Basic statistical returns. Summary Results December 1975 120 on a certain minimum dlposit-cr:dit ratic for diff3rent types of popu.lation contres may force banks to tap I.ically available. rourcas.. However, if each stata ware to demand that a given proportlon of deposits collected in that state should be utilised within the stato,' a redistribution of crsdit' among states to achieve other objectives may become impossible. There is, thorefore need for a cautlous use of this ratio as a policy variable. II.. CREDIT TO PRIORITY SECTORS -.The necd tcr.rechannel credit had been recognlzed even prior to nationallsation of banks., However,. only after nationali- satl'cn spscific guidelines came to be Issued by the-monetary auth6arities to banks with respect to rsdeployment cf Credit. In relat-ion to cradit allocation ona can discern three dif ferent lines of thought, Ona stand 'emphasi.zod the need fo: the credit granted by commercial banks to the various sectors 'con form to the production targets laid down for the various scctors in the pi-an document. This is what is perhaps impli.d by the tarm 'credit planning ý. Tho second lina c f thought was that because c f the urban blas, the banking system in the past had noglected to provide credit for certain sectors af the aconomy and therzfore there was need to d3vota special attention to certain sectors of the economy. .... - 121 This is how thd 6oncept a ' riority sectors' arose. The third line of thought consistent with the dominant economic thinking at the time of nationalisatich was that the banking system had kept the man of limited means out of its purview and therefore banks by suitably altering the lending procedures should come to the help of the small man. Credit planning in the sense of dovetailing credit granted by the banking system with the productiat targets laid down in the national plan is still to be attempted either at the aggregate level or at the level of individual banks. In fact one sees very little correlation between the increase in bank credit and the increase in physical .productic.n of the various industries. Much of the attention has therefore been. concentrated on'what the banking system has been able to do f= what are called the priority sectors. It is this. incrpase in they credit granted 'for the priority sectors which is held out -as a qualitative change in banking. The, term lpria'rity sectors' is.now taken to include credit granted to- agriculture, small scale industries and small businesses. On the. eve of the nationalisation of the commercial banks, the total credit outstanding against the priority sectors was Rs.505 crores. This comstituted 14 per cent of the total outstanding bank credit., As of April 1975, credit outstanding against the priori!ty sectors' 122 was Rs.2,,773 crores constituting 25.3 per cent of the total out- standing bank credit. ithin the priority sectors, the sharpest rise has been in relation to agriculture (Table 2.4). The two major components of the priority sectors are small scale industries and agriculture. We examine in detail below the extent and composition of bank credit to these two sectors. CREDIT TO SMALU. SCAL INDUSTRIES The term 'small scale unit' is used to denote a unit which has an investment in plant and machinery of Rs.7.5 lakhs or less. More recently this limit has been raised to Rs.10 lakhs. Credit to such units .began in a small way when the Stata Sank of India started lending to such units in the 1950s, In 1956 the State Sank of India began with a total outstanding loan of Rs.10 lakhs extended to 25 ,units. Since then all commercial banks have taken a special interest in lending to small scale industries. As of Oune 1969, the total outstanding credit against small scale industries was Rs.286 crores and the total number of units receiv- ing assistance was 57,000. As at the end of Zune 1976, the total credit outstanding was Rs.1,222 crares and the total number of units assisted was 3,01,000. Credit granted to this sector as a percentage of total advances increased from 7.7 per cent in %une 1969 to approximately 11 per cent in une 1976 (Table 2.5). While there 123 TASLE 2.4 TOTAL SANK CREDIT' TO PRIORITY SECTORS (Rs. in crores) June June June April April maarch March 1969 1970 1971.... 1-975- 1976 1977 1978 Gross Bank Cradit 3599 4213 4805 8787 10967 13329 14918 Priority Septors. 505 8.70 1026 2150 2773 , 3378 408,4 (14.0) (20.7) (21.4) (24.5) (25.3) (25.3) (27.4) 1. Agri- culturu 188 342. 382 785 1042 1343 1591 (5·..22) (a.12) (7.95) (8.93) (9.5) (1.8 -10.66) 2. Small 286 414 500 104ý 1188 1403 .1667 scale (7.95) (9.83) (10.41) (11.87) (10.83) (10.53).. (11.17) industries 3. Others 31 114 144 322 543 632 .826 (0.86) (2.71) (2.99) (3.66) (4.95) (4.74) (5.54) Note : Figures in brackets represent percentage to gross bak dredit 124 TASLE 2.5 : AGVANCS BY SCHEQULEO COMMERCIrL 83;NKS TO SMALL-SCALE INOUSTR IE 5 (Rs. in crores) As on the last Friday af June June June June June June 1969 1972 1973 1974 1975 1976 1. Numbar af Units 56983 125069 188041 210258 239997 301061 (8r807) (176430) (224839) (276918) (310238) (380893) 2. LimIts sanctioned 592.5 959.2 1170.0 1452.8 1586.4 1814.0 (Rs.) 3. Salance outstanding 285.6 598.4 723.5 979.7 1050.6 1221.8 4. Salance outstanding as percentage of lImits sanctioned 48.2 62.3 61.8 67.4 66.2 67.4 5. Total outstanding advances of scheduled commercial banks -3700.5 5465.7 ý346.0 7274.9 8925.0 11,463.7 (Rs. 6. (3) as.percentage of (s) 7.7 10.9 11.4 13.5 12.5 10.7 Note : Figures in brackats zelate to number af accounts Source a RSI Sulletin January 1976 and February 1977 125 has been. a substantial incrase in the a-edit outstanding,. it may, however, be notod that as a proportion o.f tota't advances, it seems to havo stabilised around 11 to 12. per cent. In relation to small scale industries, banks provide both term loans and short term working capital credit. At the end of June 1975, the outstanding term loans at Rs.178 crores formed 17 per cent of the total outstanding bank credit to small scale industries. Term finance to small scale industries is provided besides banke by the state level financial institutioni. One estimate shows that as at the end: of March 1975, the total term finance outstanding against small scale, industries was. Rs.340 croros. Thus banks provided approximataly half of the term . finance extended to small scale industries. Institutional Sucoort In order to help commercial banks in provid.ing credit to small scale industries two kinds of institutional support are., available. One is the credit guarantec scheme operated by the Reserve Bank of India acting as- an agent of the Goernment of India to provide insurance cover to banks against the credit granted by them to .small scalo industries. Virtually the entire credit granted to small scale units by banks is/now covered by this insurance scheme. The implications. of this scheme arg disäussäd in grocter detail in anothor chapter. The second institutional support ccms in thc form of special refinance provided by the Industrial Oevelopment Eank of india. Under this schema, credit grantod by the commercial banks and the state finance corporations in tho form o f term finance tr small scale industries is refinanced: by the Industrial Development Sank af India. During 1975-78, the Industrial Oevelopment Sank af India refinanced advances to the tune of As.157 crores of which the state finance corporations got Rs.123 crores. The amount of refinance availed of by commercial banks now is limited.. However, the existence of such a refinance scheme would be of great help to .banks particularly at a time when a restrictive monetary policy operates in relation to other sectors. Nature of Industrios Assisted A detailod break-up af the small sc:lo industrios receiving assistance from banks accörding to nature of industries is not availabla. However, the industrywiso analysis of the guarentees outstanding under the credit guarantea schoma is available. This analysis shows that food Manufacturing industry accounted for the largast shara (12.3 per cent) followed by textilas (11.1 per cent), motal products (106. per cent), chemical products (8.4 per cent), manufacture of machinery other than the electrical machinory 127 (6.7 per cent), electrical machinery and equipment (6.5 per cent) and basic metals (S.6 per cent). At least 75 per cent of the small scale units assistad are tied, one way or the other, with the large scale industries. Thus theiups and downs of the large scale industry have an immediate effect on the small scale industries also. Distribution of Credit Statawise distribution of loans outstanding to small scale industries as at the and of Ouna 1976 is presented in Table- 2.6. The dominance of certain states in the total credit is very clear. Maharashtra, Tamil Nadu and Gujarat account for 40 per cent of the total credit outstanding. At the other extreme there are states like Orissa and Himachal PradGsh which account for lass than one per cent of tho total credit.outstanding. There has beon no perceptible change in the distribution of credit among states over years. In .1973 the three -states of Mcharashtra, Tamil Nadu and Gujarat accounted for 42.5 per cent of the total bank credit granted against small scala industries. Thus the general phenomena that we have noted earlier of a relatively small number of states accounting for bulk of the deposits and credit holds good, even in the case of credit to small scale industries. If one of the aims of encouraging small scalc industries is to widen the industrial base geographically, this certainly has not been accomplished. - 1,29 Oefault Risk. 'Banks themsalvGs do not regard lending to small scale industries as exposing them:to greater.risk. We have not been able to calloct any concrete, data regarding the default risk in small scale industries.. However, one rough indicator is provided by the data'available with the credit guarantee scheme for small scale industries. As against the total autstanding guarantee of Rs.11725 crores; in 1975, the number of advances under default as reported by- banks was Rs.41 c ores. As against tha.total. guarqnteo, outstanding of Rs.2,195 crores as an June 1977, the- number, of advances under default was Rs.91 =ores. The default rate works out to less than five per cent. This would presont a true picture of the nature of lending to small scale industries if banks reported all a f their loans in default- to. the credit guarantee scheme. There is some evidence to show that this is not to. Also,no t all loans under default need be trehted as irrecoverable. -Thus at least the -availabla evidence indicates that there is no gteater default risk in rolation to small scale industries, It ma -Pe noted- that as at the and 3f June 1975, 'the total amount a f credit outstanding against largo and medium industries was in tha neighbourhood of R.s.60000 crores and a recent study by the Reserve Bank of India shows that the total outstanding credit against large sick units amounted to Rs.508 crores. ............ 130 Thus, if anything the default risk in tho casa of small scale industries cannot be deemed to be highor than the default risk in the case of large and medium industrias. However, there is evidence to show from the data provided toy the credit guarantee scheme that the proportion of loans in default to outstanding guarantees has been showing a rise. - In the case of one .bank from which we were able to collect detailed data, the total bad and doubtful debts which was treated as the sum of the cases against which claims have been lodged with the credit guarantee scheme and the cases under observation' was four per cent of the total credit outstanding against small scale industries. A regionwise distribution does not show any sharp difference between one region and another region (Table 2.7). Problems in Lendiri Most banks have analysed in great depth the problems faced by the small scale units.. With the substantial incrsase in to such units credit /banks have also tried to identify the problems faced by small scale industries. Seing units run with limited resources, these units do not always have adequate managerial expertise. In fact, this has been one of the deficiencies noted by many barks. The lack of managerial expertise is reflected in the absence of planned approach to the activities in functional areas such as 131 TABLE 2.7 REGIONAL OISTRIBUTION OF DEFAULTS OF SMALL-SCALE INDUSTRY BORROWERS. IN ONE BANK . (Rs. in lakhs) Total advances Total bad/doubtful to SI unWit SSI defaults* (1) (2) (3) Southern 769,00 34.63 (4.50) Northern 1404.00 55.03 (4.53) Eastern 705.00 35.97 (5.10) Western 6935.00 227.21 (3.27) Central 1249.00 11.28 (0.90) TOTAL 11,063.00 374.12 Nota: Figures in brackets represent the percentage of (') to (2) *Claimed cases + cases under observation finance and marketing. An indapth study of 120 units by the State Sank of India also showed that most of the units had a poor equity base and these limited resources did not permit any margin of error. Small scale units usually. start. with- ratios ranging from 1 : 3 and 1 : 5. A law equity base makes a small scale unit vulnerable to environmental pressures. Once a unit is faced with trouble it gets into a vicious circle from which it is not atle' to extricate itself. When bank funds are"not forthcoming, it is not uncommon for these units to resort to high interest borrowing to overcome what they regard as a temporary situation and this only makes the prcblem worse. Banks have been increasingly involved in setting up consultancy cells in order. to guido the small scale units. Banks begin to adopt a stern attitudd once a d6 fault occurs and this in turn also aggravatos the problem. Imposition of penalty rates of interest tends to worsen the situation. The Stati Bank of India study indicated that the interest burden in the 'case of 52 loss-making units was 12 per cent of the sales .turnover. Thus, in relation to small scale industries, the need for banks to play a much larger role..than just providing crdit, has been frequently emphasised. Banks have necessarily to play the role of a guide to these units as the units themselves do not have the necessary expertise. 133 Small Industry and Small man Providing assistance to small scale industries is certainly not to be mistaken as providing credit to small men. As at the and of June 1976, the total numbcr of units assisted was 30 lakhs and the total outstanding credit was Rs.1,221 croraes. Thus on an average, the advance per unit was Rs.60,000. There is, however, reason to believe that bulk of the credit must have gone to much larger accounts. In Maharashtra which accounted for 20 per cent of the total credit outstanding, the advance per unit at the and of June 1976 was Rs.1 lakh. In this context we also examined the data available on the distribution of ouitstanding bank credit according to the size of credit limits. As at the and of 1974, the total amount outstanding under manufacturing with credit limits up to Rs.5 lakhs was approximately Rs.951 crores. The total amount of outstanding credit in Juno 1974 against small scale industries was Rs.971 crores. Thus tho total amount of credit outstanding against manufacturing with credit limits of less than Rs.5 lakhs can bo said to represent largely the credit --granted to small. scale industries. When we analyse the distribution of outstanding credit according to size limits, it is seen that of these advances of Rs.951 crares, Rs.570 crores were for accounts with the credit limits falling between one la<h and five lakhs. This would imply that even though average size of the account is '134 small, bulk of the credit to small scale industrios must have gone to borrowal account whose credit limits were betwean Ps.1 lakh and RsiS lakh.s. Since the definitan of the small scala unit is an unit whose original investment in plant and machinery does not exceed Rs.7.5 lakhs, one should not be surprised if the bulk of the small scale units which have been holped are those whose -:credit limits are more then one lakh. This implies that the persons who received such assistance from-banks are not necessarily men of small means. Taking into account the expected raturn on equity and the salary to which they may be entitlod, their income will not fall into the lower income groups. Oustification for encourag- ing the small scale industries rests on many grounds. However, the small industry borrowers as they are now, should not be confused with the small men.. The two-terms are not synonymous. CREDIT TO AGRICULTURE Bank credit to agriculture prior to 1969'was limitad and it was confined to tea and coffec plantations. With the bulk of bank branches and deposits concentrated in urban areas, it is not surprising that this was the situation. Also prior to 1969 commercial banks were not deemed to be the appropriate medium for providing rural credit. Policy-makers put greator faith in the cc-operative movement in achieving this purpose. However since 1969, attantion has shifted to banks and with greater emphasis on rural branch expansion, the question of providing credit to agriculture by banks began to aasume importance. The total credit outstanding against agri- culture in 3une 1969 of all commercial banks was Rs.188 crores. This constituted 5.2 per cent of the total bank credit outstanding. In March 1977, the bank credit outstahding against agriculture was Rs.1,34,3 crores constituting 10.1 per cent of the total bank credit outstanding (Table 2.4). Quite clearly both in absolute amount and as a proportion of total bank advances, credit to agriculture has shown a substantial increase. Growth in Credit to Ariculture Credit dvanced by commercial banks to agriculture and alliod activities can be either short term or long pnd medium term. Also louns can take eithar'the form of direct advance to farmers or o f indirect finance,- Indirect financa Incbudes creditto- primary agricultural.credit societies for4iving loans to farmers, credit for financing distribution of inputs and credit to electri- city boards for energisation of walls.' Table 2.8 provides a classification of bank advances to agriculture and allied activities outstanding as on lune 30, 1977. $anks have played. a larger role in relation to medium and long term credit as evidenced by the fact that these loans constituted 58 per cent of the total outstanding TABLE 2.8 .; UTSTANDING SANK CREOIT TO AGRICULTURE (JUNE 1977) (Rs. in crorss) cirect Indirect Total Finance Finance Short-tarm 450 110,52) (42.42) Medium-tarm/ Lcng-term . 520 240 760 (5.7.58) TOTAL 970 350 1320 (73.48) (26.52) Note: Figures in breckats indicate perczntage to total 9N 137 credit to agriculture. As is to be axpected, direct finance constitutes the greator proportion of the total outstanding credit. Table 2.9 provides a bird's eye vicw of the progress of agricultural financing by scheduled commorcial banks over the period 1969-1975. Between June 1969 and December 1972 bank credit to agriculture rc5se from Ra.188 crares to Rs.501 crares thus increasing by 2.6 times. In the next three years agri- cultural credit-rose by 2.1 times from Rs.501 crares to Rs.1,.070 crores. Along with the increase in the amount of credit advanced, there has been a similar increase in the number of accounts. In the case of direct finance, the number of accounts increased from 2.57 lakhs in June 1969 to 12.2 lakhs in December 1972 and to 26.5 lakhs in December 1975. The amount outstanding per account showed a slight decline between 1969 and 1972 and showed a slight rise between 1972 and 1975. As at the and of December 1975, the outstanding amount per account was Ps.2,222. Between 1972 and 1975, the number of accounts'rose by 117 per cant while the credit increased by 148 per cent so that th :utstanding amount per account showed a slight rise. 138 TASLE 2.9- PROGRESS CF AGRICULTURAL FINmNCING SY SCHEOULED COMERCIL BANKS 1969-75 Jung December December December December 1969 1972 1973 1974 1975 Acriculture and allied activities Number of accounts (in lakhs) 2..68 13.7 18.1 22.1 30.4 Amount (in crores) 188 501 665 830 .1070 i-.unt per (Rs..) 7015 3657 3674 3756 3520 pccount 7- of total bank credit advancea 5.2. 8.9 9.4 10.2 1.0.7 J4.rect finance: hum'er of accounts (in lakh.) 2.57 12.2 15.7 19.29 26.5 i:,rount (in crores) 54 237 333 418 539 Amount per account (As.) 2101 1943 .. 2121 2167. 2034 The increasing role of commercial banks in providing agri- cultural,credit is also raflectad in the rising share of scheduled commercial 'banks in the total: ins.titutional finance provided for agriculture cnd alliod activities. As of Dune 1973, the total credit provided by the commercial banks both by way of short term and long term finance constituted 20 per cent of the total credit- made available to agriculture by all institutions. In Oune 19771, this proportion rosd to 29 per cent which must be deemed to be a substantial increase (Table 2.10). The share of commercial banks irr the 'total short term credit is 28 per cent while its share in the total institutional finance for long and medium term credit is 29 per cent. While it must be admitted that commercial banks have substantially increased: their credit to agritulture, the increase in agricultural credit in real terms is not that impressive. *s mentioned earlior, between Oecember 1972 and December 1975., the total amount*of credt extended to agriculture increased by 2.1 times. The impact in real terms will depend upon the deflator usd For tho -urp-ceoPdnfl=atio the po o i ne is the one relating to the total cost of production. However we, have not been able, to find such a suitable index. If we look at -the fertiliser prices, it is found that the inde for the price of'urea rose from 128 (bas*j968-1969 = 100) in 1972 to 257 in 140. TASLE 2.10 : INSTITUTIONAL FINANCE FOR AGR:CULTURE (Loens outstanding as on June 30) (Ras. in cråres) 1973 1974 1975 1976 1977 A. OIRECT FINANCE I. Short-term (1 to 4) 859.6 985.2 1149.9 1377.4 1596.6 1. Primary agricultural credit sociaties 721.1 806.6 903.7 1012.1 1133.5 2. Government departnent loans N.A. N.éA. N..A. N.A. N.A. 3. Scheduled commercial banks 138.5 17'1.6 246.2 363.8 -450.0 4. Regional ruraZ banks - - - II. Medium-term/.ono-term (1 to 3) 1319.2 1419.8 15.73.7 1771.5 1966.2 1. Primary agricultural credit societies 257'. 248.4 272.9 287.1. 308.9 2. Land Development banks 858.2 914.5 983.5 1057.9 1137.3 3. Scheduled commercial banks 203.2 256.9 317.4 . 425.5 520.0 Total direct finance 2178.8 2404.9 2723.6 3148.9 3562.8 8. INDIRECT FINANCE I. Shott-term (1 to 3) 203.5 254.1 393.5 337.0 393.4 1. State co-operative banks -74.2 102..9 175.8 150.5 .. 193.4 2. Central co-oparative banks 66.5 94.8 118.4 86.8 90.0 3. Scheduled commércial banks 62.8 56.4 98.4 99.7 110.0 II. Medium-tarmn/Lono-term (1+2) 239.6. 318.2 421.9 , 517.3 640.0 1. Scheduled commarcial banks 127.4 155.1 181.2 201.8 240.0 2. Rural electrification corporation 1imitad 112.2 163.1 240.7 315.5 400.0 Total indirect finance 443.1 572.5 815.4 854.3 1033.4 Source:- Report on:Currency and Finance 1976-77, Volume I. :141 Decomber 1975.. Thus fertilise= prices rose by 100 per cent during this period. On this basis, the inctease in agricultural credit in real terms wi,ll almost 'be nil. HoQbver, the wholesale price index between December 1972 and 1975 rose by 40 per cent. If we had used the wholesale price index as the deflator, the increase in agricultural credit would be by 77 per cent as against 148 per cent for the, undflated figures. hile rural. branch expansion has been the main factor res- ponsibla' for the increased interest in credit to agriculture, data on- the distribution of credit according to purpose and according. to populatior centres show that rural branches. are.not the only sources,of credit to agriculture. These data are presented in Table 2.11. The first part of the table indicates that of the-t6tal, credit made available to agricult4"e, 22 per cent came from rural bank aoffices, 30 per cent from semi-urban offices,. 25 per,cent from urban offices end 21 per cent from metropolitan centres. Thus credit to agriculture does not necessarily flow from rural and semi-urban offices. Bulk of the credit granted by the metropolitan centres is in the form of indirect finance. As can. be sean from the same table, 50 per cent of indirect', finance to agriculture. came from metropolitan centres. The 'second. part of the table also reveals that only 35 per cent of the' credit granted by rural branches went to ------------------ .............. 142 TOTAL 2.11 D DISTRIBUTION OF CREDIT TO DIFFERENTOCCUPATIONS IN DIFFERENT PØPULATION CENffRES (As an last Friday af June 1975) (In percentagea) Centerwise distribution af total Occupationwise distribution.of Occupation credlt fo eanh occupation total credit for oa- h centro Rural Seml- Urban Metro-Total Rural Sem- Urban Metro- Total for Urban poli- for all Urban poli- all con- tag centres tan tres 1. Direct financo to agriculturW 34.3 42.9 17,7 5.1 100.0 30.0 14.0 3.9 0.5 5.2 2 InJdireot finance to agrvcUlture 5.1 10.5 35.6 46.6 100.0 2.9 2.3 5.1 2.9 3.3 3 Allied activiti.. 18.3 27.1 39.2 15.4 100.0 *2.6 1.5 1.4 0.2 0.9 4 Total agriculture and allid activitios (1 to 3) 22.4 29.9 26.1 21.6 100.0 35.5 10.6 10.4 3.6 9.4 5 Plantationa - 5.2 15.5 10.6 68.7 100.0 1.3 1.6 0.6 1.8 1.5 6 Industry (including mining) 3.7 12.4 20.5 63.4 1Of0.0 35.1 46.0 49.2 64.5 56.5 7 Trade (including retail tradQ) 2.3 12.0 27.9 57.0 100.0 6.4 13.3 19.6 17.1 16.5 0 Transport 10.7 22.'f 32.6 33.9 100.6 4.2 3.5 3.2 1.4 2.3 9 Porsonal and Professional Servicea 6.9 . 15.2 . 27.7 5n.2 100.0 2.1 1.9 2.2 1.6 1.0 10 Electricity generation and Distribution 0.5 2.2 52.5 44.0 100lo.0 0.1 0.2 2.4 0.9 1.1 11 Construction 1.8 14.4 15.0 60.8 110.0 0.2 0.7 0.5 0.9 0.8 12 Financial institutions 2.9 9.7 22.0 64.5. 100.0 0.0 1.0 1.6 1.9 1.6 13 Porsonal loans 9.6 21.8 26.1 42.5 10(1.0 5.0 5.2 3.9 - 2.7 3.5 14 All others 9.9 21.4 29.0 38.9 10(.0 0.5 7.2 6.4 3.6 5.0 15 Total for all occupations (4 to 14) 5.9 144.9 23.5 55.7 10(1.0 100.0 100.0 100.0 100.0 100.0 Sourco: Report on Currpncy and Finance (Uol.I Econqmic.Review) 1975-76 (P.103) 143 agriculture. Rural offices have provided an equal proportion to industry. The motropolitan centres provided 3.6 per cent af the total credit to agriculture and allied activities. DeoreG of Concentration Onå issue to which we have made frequent reference so far has been the distribution af banking facilities amongsitates. One of the goals set before the banking system was to prov! 0: a more even..distribution of- bank crådit. We have firet examined th.e distribution -of bank credit to agriculture among- diffåånt regions and .then -proäå'edzd to see whether this distribution Is similar to jr-different from the provision of co-opdrative dredit. In.Tabl(32.12 we have given the relative shares of diffetent regions in the country in the outstanding direct finarice of commercial banks as at the end of March 1976. Even a'cursory -examination o-f these figures indicates that the sh'rt term loans are more unevenly distributed among regions than the long and medium term loans. In the case of short term loans, nearly 70 per cent is accountad for by the four states in the southern region. The regional distribution of bank credit must be compared with the regional distribution of some other relevant economic 144 TABLE 2.12 : RELATIVE SHARES OF 0IFERENT REGIQNS IN OUTSTANING DIRECT FINANCE OF COMMERCIAL SANKS AS AT THE ENG OF MARCH (In percentages) % share % share % share Proportion P:oportion Region af short- of medium af total o f total0 of gross tarm and long- lans cropped irrigatad loans tarm loans arsa area Northern . .1 20.5 12.2 16.4 26.7 North-eastern 0.5 . 0.4 2.4 1.9 Eastern 5.9 9.8 7.8 14.9 14.1 Cantral 4.8 22.1 12.7 30.3 25.2 Western 15.r. 23.8 20.2 16.3 7.9 Southern 59.9 23.5 45..7 19.7 23,2 145 variables in. order to draw any moaningful conclusions. We have provided in the same table the proportionate share of each - region in the total cropped area and in the gross irrigated area. In the case of åhort terin loans the central region which consists of the '-wo statos of Maåhya Pradesh an'd Uttar Pradesh account for 30 per cent of the total croppåd area but they got only 4.8 per cent of the short term loans.' HåweVer, as mentioned previously, the long and medium term loäns have a more balanced distribution. Of the total loans outstanding the southern region accounts for 47 per cent of the total.' -It may be noted that the share of the southern region in the total bank offices and in the total rural offices is approxLiiately around 34 per cent. We tried to find out whether- tha differences among states in thå amouni o f äcriclt'uraldredi,t provided by banks could be explained by some äconomic variables. One exercise wo did was to rank the districts in some select :states according to outstand- ing 'bank credit and- compare it with the rar:king of these districts according 'to fertiliser consumption. This comparison o f rankings was done for the three states of Tamil Nadu, Andhra Pradesh and Madhya Pradesh. For Tamil Nadu, we found that the rank correlation cefficient betwEen the· tankirig of districts according to fertiliser consumption and according tå outstanding credit was as high as .87. The rank correlation coefficient for Andhra Pradesh was .71 and for 146 Madhya Pradesh .40. The high correlation co-fficient for Tamil Nadu is partly explained by the fact that bulk of bank credit in that state has gone for providing short term credit. Even though this is true of Andhra Pradesh also, the correlation between fertiliser consumption and bank credit does not appear to be that strong. Certainly in the case of Madhya Pradesh, the two are very poorly correlated. We also estimated a few equations for understanding the factors influencing bank credit to agriculture in different states. We tried a number of formulations and the most successful was the one where the outstanding bank credit in various states in 1976 was regressed on the gross cropped area in each state, the ratio of irrigated area to cropped area and the number of rural banking offices. The only variable that was found to be significant was the number of rural offices which was not a very useful conclusion. In a subsequent equation that we estimated in relation to short term bank credit, we added the total amount of co-operative credit available in each state also as an independent variable to test the proposition whether bank credit went to states where co-operative aredit also went. We found in this equation that both cropped area and rural offices were significant. The outstanding co-operative credit had a nogative coefficient but was not statistically signi- ficant. The negative coefficient meant that in states where 147 co-operative cradit was strong, dank cred'it was less. However, the non-significanda of tho coefficient did not permit us to draw such a conclusion. The question whether commercial banks have gone into areas where co-operatives are also strong. has assumed some importance recently, The Dantwala Committee found that commercial banks had essentially supplied additional finance in the same areas where the co-operatives were serving well. They used several criteria for reaching this conclusion. Fo ,example, one of the criteria usod was to ran,k tho states according to agricultural credit per hectaro providod by the commercial banks and the co-operatives. A!comparison of the ranking showed that the eight top most states were ccmmon in both the-lists4 This Committee, therefore, came tol the'conclusion tha- the cdmmercial banks' agricultural credit had been additive and had not helped to fill the geographical gap in the availability of credit not covered iy the co-operatives. We have examined this prbblem further-. In Table 2.13 we have provided the outstadihq short term agricultural credit, long term agricultural credit and total agricLrltural credit provided by -commercial banks and co-operatives in different states. It is true that a comparison of the total agpicultiural credit. provided by the two institutions indidates a 61cse association between the two. The five states receiving the largest amount of commercial 148 TJABLE 2.13 a ST ATIEWISE DISTRIBUTION OF OUTSTANDING CREDIT OF COMMERCIAL BANKS `ND.COOPER ATIVES. (in Ra. .akha) Short Term Credit Long Term Credit Tktal States Commercial8ffdks Cooperative Commercial Banks Cooperatives * Commercial Banko Co-operatives 1. Andhra 0475.17 5019.95 1654.50 9622.22 10129.67 14642.17 Pradosh 2. Assam 82.70 684.63 56.20. 67.69 138.9 752.32 3. Gujarat 1676.96 15430.58 2766.00 10930.73 4442.96 17361.31 4. Haryana 231.07 2677.94 2130.28 3509.51 2361.35 6267.45 5. Jamiu & 14.81 200.54 23.00 294.10 37.81 494.64 Kashmir 6. Karnataka 2956.30 7075.68 3650.81 7057.71 6607.11 14133.39 7. Korala 2200.81 4625.55 995.17 . 1439.04 3195.98 6065,39 0. Madhya Pradesh 465.72 10254.23 3112.53 4372.81 ' 3578.25 14627.04 9. Maha rasht ra 2928.73 20684.78 5304.48 14972.24 0313.21 35657.02 10. Orissa 468.79 3125.67 243.99 1760.61 712.70 4086.21 11. Punjab 296.62 6122.44 2366.28 '6119.20 2662.9 12232.64 12. Rajasthan 241.35 3282.20 2279.77 1070.80 2521.12 .5153.0 13. Tamil Nadu 142.44 03b4.20 1762.63 10652.36 8605.07 18956.56 14. Uttar 900.00 11746.61 4516.01 13645.72 5497.f1 25392.33 Pr.adesh 15. West Bengal 769.37 2291.73 1665.23 572.65 2434.6 2064.30 * Data relatna to the end of June 1974. Sources Statisticai Stalemunts relating to Cooperatiue movement in TIdia 1973-74 ** Data relatos to the end of March 1976. Source Agricultural Credit Schemes of Commercial Banks - Report of the Expert Croup (R.8.I.) 149. bank credit 'aro Ahdhra Pradesh, Tamil Nadu, Mahaashtra, -Karnataka and Uttar Pradesh.' The five statos roceiving- the largest amount of co-operative. credit are Maharashtra, Uttar Pradesh, Tamil Nadu, Gujarat and Andhra Pradeshk The only -difference noted. in the ranking is that while Gujarat is important in terms of total co-perative credit,. it does not rank that high in terms of commorcial bank credit. However, some interesting conclusions emerge when we separate the short term credit and .long term credit and make a comparison. The rank correlation coefficient. for the total agricultural. credit between co-operatives`and commercial banks- is. .A. But .in. the case of short term credit', the rank correlation coefficient is .63 and in the case of long term credit .80. The lower rank correlation coefficient for the components of the total agricultural credit indicates a certain complomentary relatiomship between agricultural credit and commercial bank credit. For example, in the case of Tamil Nadu .th.e total outstanding short term credit. provided by co-operatives was Rs.83 crores as, against an outstanding long term credit of Rs.106 crores. Thus in relation to co-operative credit, long term crediE is more important than short term credit. When we look at the commercial banks, it is seen that the outstanding short term credit is Rs.68 crores and the outstanding long term credit is Rs.17 crores. Thus the bulk of commercial bank credit has gone for the short term credit where the co-operative movement is relatively less strong. ~tso The same position holds good or Andhra Pradesh also. In Andhra Pradesh the co-operative movement is strong in long term credit and the commercial banps are strong in short term credit. In the case of Maharashtra, the outstanding short term credit provided by co-operatives was Rs.206 crores and the outstanding long term credit was Rs.149 crores. Sut in relation to commercial bank credit, Maharashtra is strong in relation to long term credit as compared with short term credit. The long term credit out- standing, was Rs.S3 crorsa as against an outstanding short term credit of Rs.29 crores. These data indicate that while commercial o bank credit to, agriculture has also gone into states where cc- operative movement is strong, they have nevertheless played a certain complomentary role. in- terms o f distribution of credit between slort tarm.and. long term. Oistributin d00co to Size Holdinas One other .question that needs to be examined in relation to provision of agriculturaL credit is what classes of borrowers have benefited from the increased agricultural credit provided by commercial banks, Data are now available dn the distribution of outstanding credit according to the siza of holdings of the borrowers. In Table 2.14 the distribution of agricultural finance according to size group of holdings is given. 151 TABLE 2.14 DISTRIBUTION OF COMMERCIAL BANK AND C-0PERATIVE CREDIT ACORING TO 4IZE OF HOLDINGS (In percaintages) Up to 2.5 2.5 to 5 5 to 10 Above acres acres acres 10 acres 1. Co-operative credit* (Short-term) 10 21 29 39 2. Commercial bank credit (Short-term)** 34.3 21.7 18.9 24.8 3. Co-aperative credit. (Long-term) 8 22 34. 36 4. Commerdial' bank credit (Long-term) 9.2 -11É .5.7 63.3 *Short-term. finance provided by. primary agribultural credit society during 1973-74 **Short-term direct finance provided by commercial' banks to agriculture during 1975-76 3 Long-term finance provided by.. the land mortgage banks during 1973-74 Long-term direct finance provided by commercial banks during 1975-76 If credit ;o tenant cultivators, agricultural labourers and others are also includød, under. this category the ratio will increase- to 12.2 per cent Source: 1. Statistica·l tab-es relåting to co-operative credit 1973-74 2.. Agricultural credit schemes of commercial banks, Report af the Expert Group (RBI) 152 There ts a markad differerce in the distribution of credit according to size holding in relation to short, term Loans aftd tnrf laans. In the easo of short term loans nearly one-third of - .the total credit outstanding has gone to borrowers with holdings of less then 2.5 acrss. In the case of term loans, the proportion .going to this class of borrowers is approximately 10 per cent. The larger share of the big land helders; in the term finance is explained by..the fact that nearly 38 per cent of the total*term finance extanded is in regard to purchase o f traectors and agri- cultural Machinery. Ebth in relation to short term loans and medium term loans, there are considerable differences äinong states in- the d±sttibution of credit accordingtu size of holdings. The statawise analysis Is presented in Table 2.15. In,the case of short teriv credit, in the state, af Karnataka nearly 76 per cent o f che total credit outstanding is for borrowers with holdings up to 2.5 acres. In- Tamil Nadu the prDportion of total sfort term credit gding to this class of bor=owers Is 47..perr.cent. In West Sengal the proportion Is the same. At the other extreme in Il'aharashtra which accounta for 12 pår cent of t-e total short term. credit provided by commercial banks, the proportion of- short term credit going to small borowars is only 7.1 per cent. In. the case .O f Gujarat also which ranks tixth among the statss in terms of total TABLE 2.15 i STATEWtISE DISTRIBUTION OF GUTSTANOING CREDIT ACCOROING TO SIZE CF HOLOINGS (As on September 30, 1976) (In percentages) Short-term Medium/Long-term* State Up to 245 Above 10 Up to 2.5 N\bove 10 acres acres acres acres 1. Andhra Pradesh 28.1 26.0 25.0 41.0 2. Tamil Nadu 47.1 11.6 26.1 37.5 3. Karnataka 20.5 25.5 8.7 70.6 4.. Kerala 75.6 4.7 31.1 37.5 5, Gujara-t• 3.1 62.7 3.7 70.6 6. Maharash·tra 7.1 54.9 8.4 65.0 7.. Madhya Ptadesh 6.5 51.9 3.1 65.4 8. Uttar,Pradesh 21.6 40.8 6.1 6:.5 9. Bihar 32.0 11.3 17.3 39.1 10. Orissa 30.9 11.1 18.3 16.2 11. West Bengal 48.8 4.4 36.8 20.8 12.. Punjab 5.5 49.0 3.3 84.6 13. Haryana 4.8 48.4 23.5 61.4 14. Rajasthän 9.1 52.9 1.9 82.0 Ali India 32.4 26.1 11.8 61.8 Source: RBI Report of the Regional Rural Bank (Bombay-July 1978), p.29 154 crodit provided by commercial 7anks, the proportion of total shott 'term credit going to small borrowers is only 3.1 per cent. In the cåse af medium and long ·term loans also, in the statas of Kerala, West Songal and Tamil~ Nadu the proportion cif credit going to small holders is larger than in othor states. However, there is a striking difference in relation to the state af Haryana where only 4.8 per cent of the total short term credit went to small barrowers whoreas in the case of medium and long term Idans, 23 per cent went to small borrowers. In Table 2.14 we have also provided the distribution of^ comperative ardit according to the nizee af holdings. The picture is revealing. In relation to short term credit, th commercial banks certainly seom to have done much better in providing credit to small borrowers. The share of co-operative credit- going to small borrowers hCving a holding up to 2.5 ares Is only 10 per cent as 'compared with 34 per cent in the case o f commercial banks. Though the figures relating to co-operatives and the commercial banks are for different years, they are close enough to make the comparison. In,Table 2.16 we have prvided a statawise .compcrison a f the distribution of credit according to size of holdings in relation to cömmercial banks and co-operatives. As mentioned earlier, in the case af Kerala 75 per cent of the short term credit provided. by banks is for small borrowers whareas 155 TABLE 2.16. : OLSTRIBUTION OF COMMERCImL BANK AND CO-OPERATIVE.'CREDIT STATEWISE AND BY SIZE OF HOLDINGS (SHORT TERM) (In per'entage) Commercial banks.). Co-operative credit societies* state Up to 2.5 acres Above 1.0 Up to 2.5 acres nbove 10 acres acres Andhra Pradesh 28.1 27.2 14.0 37.0 Assam 40.9 14.3 24.C 1.4 Bihar 29.8 11.1 38. 20.d Haryana 5.8 39.0 8.7 31.0- Himachal Pradesh 47.3 11.0 33.0 18.0 Karnataka 20.9 27.0 11.0 35.0 Karala 75.7 3.8 36.C 17.CP Madhya Pradesh 5.5 54.3 2.6 67.0 Maharashtra 6.5 56.5 8.2 54.0 Orissa 26.8 . 10.0 17.0 23.0 Punjab 8.4 15.0 9.1 45.0 Rajasthan 6.4 54.7 8.5 40.0 Tamil Nadu 52.0 8.1 2.7- 34.0 Uttar Pradesh 16.8 43.0 8.8 22.0 West Bengal 47.1 5.4 1.0 36.0 Source; Agricåltural credit schemnes of commercial banks. Repor:t of the Exp'rt Group (RBI) Statistical tables relating to co-operative credit Kerala Tamil Nadu, Sihar - Data relate to 1972-73 Assam relates to 1971-72 *Short-tarm direct financo provided by commercial banks to agriculture during 1975-76 * Short-term financa provided by primary agricultural credit societi,s during 1973-74 156 in thr case of co-operatives the proporticn is anly 36 per cent. In ths case cf Tamil Nadu as against 52 per cent in the case of commerc*lal bznks, the proportion in the case of co-operatives is only three por cent. .However, in the case af term finance, the picture is diff?erent.. Whereas the proportion of credit going to smal.l borrowars is more ar less the same in the case of co-operative and commercial 'bank credit, there is a 'more zven distribution among other classos af borrowers in tho case cf co-aperative credit. In the case of commercial bank credit, borrowers with 10 acres and above account 3or 3 per cant df the total ou standing tarm finance. Ist'ribution of Cutstanding credit a f comm:rcial banks according' to the sizi af credit limit in relation to different soctors f.s also 'available. For the banlking system as a whole autstanding credit with credit limits of Rs.10,000 and lass has more or less stayed at the *level of nine per cent of the total credit out-tanding for the 'past several years. At the end*o f Oecember 1975, the total amount of credit outstanding with limits cf Rs.10,000 and less was Rs.963 croras'. Of this Rs.450 =rores we:e accountad for by agricultural and allied activities (Table.2.17). In the case of direct finance pravided to agriculture, the total amount of credit cutstanding at the end of Cecamber 1975 was Rs.588 croras and the amount autstanding against credit limits of Rs.10,000 157 TAeLE 2,17.- CLASSIFICA7ION OF 0UTST,ANDING CRE0IT 5CHE0ULE0 CIMMERCIAL BANKS ACCORDING TO C.CCUPATION ANO SIZE OF LIMIT. (As on becember 1975) (Rs. in lakhs) Agriculture and. . Manufacturing industry a.llied activities Range P p Propor- tion to tion to total total 1.. Rs.1000 and less .. 45019 Oé42O 3911 0.007 2. Abovo Rs.1000 and up to Rs.l lakh 23490 0.219 39530 0.072 3. Aboje R8.1 lakh and up to Rs.5 lakhs. '5546 0.052'. 61851 0.113 4. Above Rs.J lakhs and up to Rs.,10 lakhs 2926 0.027 3385:36 0.070 5.. Above Rs.10 lakhs and up.to Rs.25 lakhs 4452 0.415 58388 0.125 6. Above Rs.25 lakhs and up to Rs.50 lakhs . 4059 0.038 63139 d,11-5 7. Abovo Rs.50 lakhs and up to Rs.1 . crore 5277 0.049 72136 0.132 8. Above ils.1 orore and - - up to Rs.5 orores 11833 0.110 126285 0..230 9. Above Rs.5 crores 4396 0.041 71180 0.130 10. Composite limit and unclassified 39 0.00036 1892 0.003 TOTA.L 107039 546848 158 and loss at Rs.400 croras was 56 per cent of the total. On the same data, the total amount of tarm loans outstanding against borrowers with more than five acres was Rs.254 crares, Combining these two sets of data, one can draw the inference that even in the case of tarm loans to borrowers with holdings of more than five acres, about one-third received credit which was less than Rs.10,QOC. This is also confirmed by the fact that the average amounmt outstanding per account in the case o f large borrowers even ir the case of term finance was Ps.7,800. In the total operations of a bank these accounts would indeed be regarded as small accounts. In relation to credit to manufacturing sector, outstanding credit to parties with limits of Rs.10,000 and less does not even constitute one per cent of the total outstanding credidt. It is in this context that the shift in the attention paid by the commercial banking system must be regarded as some- thing-striking. However, viewed from the point of view of the distribution of land holding in the country, bulk of the agri- cultural credit would be regarded as having- gone to large borrowers. Uhat constitutes a big borrower in agriculture is samathing to which the banking system will have t6 reorient itself. 159 Recovery Performance Uith roughly 10 per cent of tho total outstanding bank credit going to, agricultuie an importit concern with the banks recently has been with the recovery performance of these loans. One of the unfortunate aspects of the co-operative credit system in our country has been the excessive overdues. This to some extent has crippled the growth of the co-operative credit movement. That is why with the larger interest shown in agriculture, a continuous watch has to be kept on the recovery performance of these advances. In Table 2.18 we have provided the data on the -recovery performance of the scheduled commercial banks in respect of direct finance to farmers. It covers both short term and medium and long term loans. The. recovery perfformance is calculated as a percentage of the amounts recovered to the total demand, It may be noted that total demand is not the same as the amount outstanding. At.any given point in- time, only a part of the total outstanding will be due for payment. For example, as of June 1976 as against the total agricultural credit outstanding of Rs.789 crares, the total demand was only Rs.415 crres. It is seen from Table 2.18 that there has been a slight improvement in the recovery performance of banks over the three years 1974 to 1976. The percentage of amount recovered to total demand increased from 50.7 per cent in June 1974 to 51.9 per cent in June 1976.. One might TABLL 2.18 : RECOVERY PERFORMANCE OF SCHEDULED COMMERCIAL BANKS IN RESPECT OF OIRECT FINANCE TO FARMERS (Ra. in lakhs) As on Oirect finance to farmers (short-tarm/medium-term last and long-term loans) Friday of June Total Amount Overdus Balance Percent- Percent- demand recovered amount outstanding age of age o f (3) to> (4 ) to (S) (1) (2) (3). (4) (5) (5) (7) 1974 22767.50 11544.08 11223,42 42099.88 50.70 26.56 1975 -32392.68 16725.86 15666.82 56590.22 51.53 27.68 1975 41S58.72 21586.83 19971.89 78920.26 51.94 25,31 Loans for allied activities. are not included Source: Special return on agricultural loans (Reserve Bank of India) still not regard this as a satisfactory. performance even though there is no reason to classify all overdue amounts as bad or doubtful debts. However, a slow recovery does impair the turnover of credit of the banking system. A statewise analysis (Tables 2.19 and. 2.20) of the recovery performanco indicates, largo aations. As' of June 1974, the recovery performance'in Assam was only 18.1 per cent whereas in Kerala it was 73.7 par. cent. The all-India average, as mentioned earlier, was 50.7 per cent. Maharashtra which accounts for 13 per cent of the total outstanding credit had a recovery performance of only 33.5 per cent.. A comparison of the statewise performance as of June 1974 and as.of June 1976 indicates that while there is a very small improvement in performance at the aggregate level, this improved performance is.not sharad by all' states. Between 1974 and 1976, in 10 out of the total 17 states, the performance deteriorated. In the case of some states, the deterioration in performance had been ver.y sharp. In Jammu & Kashmii, the recovery rate was 73,S per cunt in June 1974 and it came dowri to 47.4 per cent in June 1976. In the case of Kerala, the per formance4 came down from 73.7 per cent to 61.9 per cent. In Himachal Pradesh and Tamil Nadu, the performance declined from roughly 60 per cent to 45 per cent. Among the seven states where the recovery performance improved are states like .Andhra Pradesh, Punjab and Maharashtra which accounted for a sizeab-le proportion of the total credit outstanding. 162 TAGLE 2.19 : INDIAN SCHE0ULO COMMERCIAL BANKS- STATE1WISE RECOVERY POSITION OF AGRICULTURAL ACVANCES (CIRECT FINANCE) (As at the end of June 1974) Percentage of State recovery to demand 1. Kerala 73.7 -2. Jammu & Kashmir 73.5 3. Haryana 4. Trmil Nadu 62.2 5. Anidhra Pradesh 61.8 6. Himachal Pradesh 60.4 7. Punjab 60.0 8. Uttar P-adesh 55.4 9. Gujarat 52.0 10. Karnataka 51.7 11. 0rissa . 49.5 12. Rajasthan 47.1 13.. Madhya Pradesh 43.5 14.. Sihar 36.5 15. Maharashtra 33.5 16. West Eengal , 24.9 17. Assam . 18.1 All India 50.7 Source: REI Sullstin, October 1976 163 TABLE 2.20 : INDIAN SCHEDULED COMMERCliL BANKS_ STATEWISE RECOVERY POSITION OF AGRICULTURAL ADVANCES (DIRECT FINANCE) (As at the end of June 1916) * -' Percentage State .of recovery to demand 1. Punjab 57.8 2. Andhra Pradesh 65.1 3. Haryana 53.9 4. Karala 51.9 5." Karnataka.. 57.9 6. Ottar Pradesh 54.4 7. Jammu & Kashmir 47.4 8. 'Rajasth.an 46.6 9. Tamil Nadu 45.6 10. Gujarat 43.4 1. Himachal Pradesh . 42.7 12. Madhya Pradesh 41.7 13. Bihar 41.5 14. Orissa 37.9 15, Maharashtra 34.2 16. West Bengal 31.3 17. Assam. 23.0 All India . 51.9 Source-, RBI Eulletin, January 1977 164 Data are availabla on the recovary prformane= of th different bank grups in different statGs. Wa have provided in Table 2.21 the recovery performance registård by the Stata Bank Group and the othar 14 nationalsed banks. In goneral, the performance o f the State Sank Grcup is battar than the othar nationalised banks. The rGeovary pe.formanco for the Stats Sank--Group is 56..4 per cent as against the performance of 4a.5 per cent on the part of the 14 natioralised b,anks, The State Bank Group has a better recovery ratio in 14 aut cf the 17 states. While in the case of mst states the dif ference in the performanco among the two grupsa f banks is only small, there aro some striking differences. In the case o f Maharashtr, the racvery performance o f the 'Stata Bank Group is 60 per cent whereas for the natio'nalised banks, it is only 34.2 per cent. Sinca Maharashtra is a state which accounts for sizeable proportion of the Qutstanding credit, this difforonce leads to a striking variation in the overall ratio, In the case c f Assam also, the State Bank Group has a recovery performance of 47.5 per cent whilo for the 14 nationalised banks, the perr,formands ratio is only 23 per cent. PS mentioned earlier the overall recovery performance of 51.7 per cent,cannot be deemed to ba very satisfactory. Perhaps this performanca is bottar then the performancs axhibitd by the co-perative system. In the case of the co-oparativos for 1975-76, it is'roported that 43.1 per cent of tha outstanding lans of the .165 TABLE 2.21 : RECOVERY RATIO AMONG (IFFERENT SANK GROUPS - (As at the eäd of June 1976) Stati - Natiänälised Ither Indian State Sank banks scheduled group commercial banks 1. Haryana 71.6 63.9 56.6 2. Himachal Pradesh 59.0 42,7 66.7 3.. Jammu & Kashmir 36.6 47.4 63.1 4. Punjab 71.a 67.8 75.4 5,' Rajasthan 54.6 46.6 54.5 6. Ass am 47.5 23.0 7.0 7. Sihar 50.9 41.5 72.7 8. orissa. 46.0 37.9 14.1 9. Udest Sengal 43..6 31.3 73.9 10. Madhya Pradesh 51.7 41.7 63.4 11. Uttar Pradesh 64.9 54,4 49.3 12. Gujarat 33.6 ..43.4 13. Maharashtra 60.0 34.2 45,2 14. Andhra Pradesh 68.1 65.1 62.0 15. Karnataka 46.0 57.9 54.1 16. Kerala 64.1 61.9 83.5 17. Tamil Nadu 59.3 45.6 54.9 primary agricultural credit societias was overduc.• As at the end of 2une 1974, the total outstanding cradit of primary agriculturzl credit sociatics was Rs.1,055 croras and the amount of overdues was estimated at Rs.4-43 crors. Thus thc ovorduas as a porcantage of outstcnding credit amounted to 43 per cent. Data in relation to the co-operativo movemant regarding the total demand, as against total *utstanding aru not availablo. 'For the banking system ovordua amount as a percontage of credit cutstanding as at the end of June 1974 works cut to 26.7 por cent. In the case of primary agricultural credit societics,out of tha total overdue- of Rs.443 crores, 49 per ccnt was -vurdue for a period of one yoar and lss, 18 per cent between ond and two years, 15 per cant bctween two and three years and 19 por cznt over threo years. The amounts overdue for L period a f threo yors and above must be deomed .to be highly doubtful debts. Similar data are no.t availabld',for the banking systam. One question that has bean reised. in relation to the recoveri3s has been whether tho small borrowars are. mare prone to defau-lts than the large borrowers,. One of the major objectives of the extansion of institutional credit into rural areas is to enablå the small borrowers to have accass?-to institutinal finance. It is for this reason that while analysing the credit exte'nded to agricultur, we had alsoexamlned the distribution of credit according 167 to sizo of holdings. This aminntly desirable objective can go against econ6mic viability, if the small borrowers are found to be bigger defaulters. In relation to the co-operative movement, a study team. was set up.,to. axamine the overduos of co-operative credit institutions. We haQe prasented ih Table 2.22 the overdues of short term coperative loans advanced by selected primary agricultural co-oparative societies. The position relating to chronic overdues defined as overdue for three years and above is provided in Table 2.23. These data indicate that the extent of overdues is about the same for all groups of farmers except for those with less than three acres. These data certainly show that the extent of verdues is not low for large farmers. It may also be noted in this context that these figures do not perhaps show the true pictura regarding the position of overdues because many institutions resort to rescheduling of loans on a large scale leading to an over-statement of the loan recovery performance. One of the reasons given for the poor repayment performance of the large farmers is.that many such farmers being politically and economi6ally influential do not observe the necessary financial discipline and they also prevent the usual control mechanisms to operate in relation to their defaults. While the conclusion drawn by the study team ih relation to the co-operative movement may well apply to the commercial banks also, there is no direct evidence to show that small farmers are loss prone to greater defaults. We have TABLE 2.22 : OVEROUES OF SHORT-TERM CO-OPER"TIVE LOANS AOVANCED BY SELECTED PRIMARY AGRICULTURAL. CO-0PERAsTIVE SOCIETIES SY FARM SIZE, 30 JUNE 1972 (In acres) S.ze ar farms Datails Tanants Selow 3 3 - 5 5-10 10 and Total. atc. abovs 1. % af de fau- Iters to corrowing member farmers 90 83 83 80. 73 80 2. %o f over- due amount. to out- standing loan 76 71 67 6453 55 Sourca Resorve Bank af Indla, Report af the Study Team on Gvardues of Co-aperative Credit Institutions - . 1 69-' TABLE 2.23 CHRONIC OVÉRDUES OF~SHORT-TERM CO-OPERkTIVE LONS ADVANCED BY SELECTED PRIMARY kGRICULTURAL CREDIT SOCIETIES BY FARM SIZE, 30 UNE 1972 Siza o f irms Detpails Tenants Bdlow 3 3- 5 ' -10 10 and Total etc. above Overdues ..for 3 years and above'to total over- dues 1. %of default- ing members 56 46 41 38 38 43 2. %of default amount 39 37 32 30 22 27 Source Reserve Bank af India, Go. cit. p.48 1? howGver, oxaminod the relatior,ship between the r.covery performance of banks in various states and the distribution af credit according to s.ize of holdings. Kerla, which had a high recovery rat af 62 per cent in 1976. had 76 per cent of !ts short term credit going to borrowers with less than 2.5 acres and 31 per cent af ita medium and long term credit goint to 'the~same class of borrowers. Cn the other hand Maharashtra, where 5b per cent of the short term credit 4 and 65 per cent of the medium and -long. term credIt hed gona to borrowers with 10 acres and above, hed a low recovery performance of 34.2 per cent. Similarly in the caso of Gujarat 63 per cent of short term crodit and 71 per cent of the medium and long .torm credit have gone to borrowers with 10 acres and above and Gujaratts recovery .performance was only 43.4 per åent. While no firm conclusions can be drawn from those data, they novertheless indicate that states with a large proportion of credit going to big farmers do not necessarily show a bottar performance in relation to recovery. SUMMARY At the time of the nationalisation of the 14 major commercial banks in 1969, one of the concerns expressed was the uneven distri- bution of bank credit among states. In order to correct this deficiency, policy-makers began to monitor the behaviour of 171 credit-deposit ratio in cifferent states. Rlthough differences have narrnwed over .the last six years, there is still a consider- able variation in this ratio among states. The credit-deposit ratio in metropolitan centres is far higher than the ratio in urban and semi-urban centres resulting in a transfer of funds to metropolitan centres. Insistence upon a minimum credit- deposit ratio for. different types of population centres may force banks to. tap more effectively the locally available resources. However, if each state were to demand that a given proportion of deposits collected in that state should be utilised within the- state, -A redistribution of c redit among states to achieve other objectives such as a more equitable distribution of per capita bank credit may become impossible. A second concern felt at the time of the nationalisation of banks related to the neglect of certain sectors by the banking system. In order to rechannel bank credit along certain desirable sectors, the monetary authorities began to impose certain obli- gations on banks in relation to deployment of credit. The two major sectors to which banks were expected to provide larger amount of credit were the small scale industries and agriculture. 172 Lending to small scale units though a new experience for banks w'as perhaps closest to the business they were already doing. Credit granted to this sector as a percentage of total advances has'shown a sharp rise even though they appear now to have stabilised around 11 to 12 per cent. Lending to small scale units by commercial banks has been helped by two kinds of institutional support - .a credit insurance scheme and a re finance scheme. Even in relation to credit provided to small scale units, threci, states dominate.. The available data do not indicate that the dafault risk is higher in the case of small scale units. While there is sufficient economic justification for providing credit to small. scale industry, lending to such units is not necessaiily lending to small men. The small industry borrowers of banks by and large fall in the high income brackets. Bank credit to agriculture prior to 1969 was largely confined to coffee and tea plantations. Since 1969, both in absolute amount and as a proportion of total bank advances, credit to agriculture has shown a substantial increase. The increasing role of commercial banks in agricultural credit is also reflected in the rising share of scheduled commercial banks in the total institutional finance provided for agriculture. 173 The distribution of bank credit to agriculture again shows pockets of concertration. In relation to short term credit, the southern-region accounts for 70 per cent of the total. Even though commercial bank credit has also gone primarily to states where co-operative institutions are strong, there is a certain complmea.Ltary relationship between co-operative and commercial bank credit. Commercial 'bank credit has gone more for short term credit in states where the co-operative movement is strong in relation to long term credit and has provided more longtarm credit in states where the co-operative movement is strong in short term credit. The distribution of agricultural credit according to the size of holdings ihdicates that short term credit is more evenly distributed among large and small borrowers than term loans. A comparison with the co-operativo credit shows that in relation to short term credit again, the commercial banks seem to have done much better in providing credit to small borrowers. In relation to recovery performance also, the commercial banks have done better than the co-operatives. However, a recovery performance of 52 per cent is still not satisfactory. There is no evidence to show-that the dafault risk is greater in relation to small borrowers than large borrowers. On the other hand, states with a large proportion of credit going 174 to small f.rmors havo shown a bottor performance in relation to recovory. Considered along soveral dimansions, such as the rate o f growth in credit and deposits, the shara of small borrowers in the total credit and recovery ratio, the performancm of the commercial banks is as satisfactory, if not better than that of the cc-aperative institutions in providing credit to agricult.tre. .. ..Captai* 3 CREDIT GUARANTEES To promote an increased flow of bank credit to the new sectors such as small scale industries, it, was felt necessary to provide some form of insurance cover which would give protection to banks against possible losses on credit granted by them to such sectors. The year 1960 saw the birth of two insurance schemes. The Export Risks Insurance Corporation,.which had already been set up to protect the exportars against the risk of non-payment by foreign buyers, introduced a new. scheme in that year to protect banks against losses that they might suffer due to the default .p the exporters to whom they might have extended .preshipment advances. In:. the same year, the Government of India introduced a scheme to. provide. protection to banks- against losses that they might indur on extending credit to small:scale industries. The credit guarantee'scheme for small scale industries. has, been modified over years. to make thd scheme more flexible and liberal. In 1971 a separate Credit Carantee Corporation was set up to provide guarantees to banks with respect to their advances to: small borrowers in agriculture and other sectors. In this chapter iije examine the credit guarantee systems*as they are now operating in relation to 176 small; scale induistris ad small borrowers. After provIding the details of the tw. schemes, we exemine how far these schemes havs been instrumental in fulfilling the" basic purpose of enlarg- Ing the flow of credit to smald scale- indstrial- units and other small borrawers. .CREDIT QUARANTE sEHVI,.FOR SMALL SCALE INOUSTRES The credit guarantee scheme for small scala industries was lntoduced in July 1960 by the Government of India. The, Räserve Sank of India operates this schema on. behalf.of the central government. The scheme was introducad initially .in 22 :elsectd districts as an experimental measurs. .t was extended gradually to other districts. In January 1963, it was placed on a permanent basis and made applicable to ths whole country.. This scheme was reviewed by. a .working.- group appointad by the Reserve San o.f India ir 1969.. Some ma~jcr changes were«introduced in 1970. The schema provides pratection not only to banks but also to state finance crporatons. and se.Iected c'-operativå institutions in relation to the±r credit to. small fcale-Indutries. At present there are apporximately 280 istItutins-which are provided protection, lie give below some o f the details of the scheme. 1.77 Details of the Scheme Scope of the guaranteel The guarantee scheme covers a variety of credit facilities granted to small scale units. They include working capital.1advances, term loans, instalment credit, deferred payment and loan guarantees. Advances covered under other which. insurance schemes are excluded. Sanks join this scheme are expected to cover all eligible credit facilities granted by them. to small.-scale units. Thus, it is a whole-turnover guarantee. Eligible units: The scheme covers credit facilities granted to small,scale units'defined as those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery, does not exceed Rs.7.5 lakhs. More recently, this limit of Ra.7.5 lakhs has been raised to Rs.10 lakha. A higher limit is fixed in the case of certain types of ancillary units. Small scale units which are engaged only in specified activities are eligible for guarantee under the scheme. Edt the activities covered are fairly. extensive to include almost all small scale units. Activities not covered in this scheme are by and large...covered by the other insuiance scheme relating to small borrowers. 178 Extent of the guarantee The scheme provides:.får a. payment of 75 per cent of the amount in. default or the emount guaranteed wh£'chever is- lower. The maximum amount recoverabla from the gdarantge organisation in respect of guarantee accounts is limitd per borrower to Rs.7.5 lakhs in respect o.f working capital advances and Rs.2.5 lakhs in-respect of term loans. Thus, part of the loss will have to be borne by the bank itself and. this will ensure adaquate. care and control on the part of the banks. 'In the insurance terminology, this is referred to as coinsurance An exception, however, has been made in the rese of credit granted to technocrats. In this case the cover has been incrased to 90 per cent.. Guarantee eee: The guarantee fee is collected at one-tenth of ona per cent per- annum on a quarterly basis. In the ' -se of working capital. the- fee ls caltulated on limits sanctioned and in Iespect of term loans on .th'eautstanding talance as at the end of a quarter. It may be noted that fee is calculated on the total .outstanding or rn' the limits sanctioned even though there is a limit on the maximum amount a f loss to be borne by the credit guarantes,rganisation. Procedure for»clåims: The oredit institution must report to the credit guarantse. organisation as soon as it feels that a 179 loan iq at defaul,t. Thereafter the credit instituiO.n may invoke the guarantee by submitting claims.. Claims are required to be settled within 30,.days of the receipt by the guarantee organisation if all the necessary particulars and documents are enclosed. After the payment of a claim, the guarantee organisa- tion is discharged of all of its obligations under the guarantee. The unit on whose account the claj-7 has been paid will not be eligible for the guarantee facilities so long as the claim amount or expenses incurred by the guarantee organisation remain uncovered. The.credit institutions'are required to take necessary actlon. for. the-recovery of the advances from the defaulting units, Tthe recbVery so effected are to be shared with the guarantee organisation in the same proportion in which the loss has been borne by the guarantee organisation and credit institutions. The purpose of introducing the credit guarantee scheme is to enable the banks and Q.,her credit institutions to take a liberal view of the crodit needs of small scale in-idustries and to induce them to take a need-based approach rather than a security-based lending. .The guarantee fee has been fixed at a very low level in order to see that the burden is not very high. There is also an element of refinancing in this scheme because claims can be settled and paid even before the security is anforced 4 180 . or legal remedies are resorted to by credit institutions against the borrowers for recovery of dues. the. Over/years a number of changes have been introduced in this scheme in order to make it more flexible and advantageous to the banks. One important change was introduced in 1970. As a. result, the system of submission of individual applications for guarantee which had been in-force earlise was dispensed with. The guarantee cover is now available for all eligible loans and credit facilities extanded by approved credit institutions after they execute an agreement. The credit institutions submit every quarter a list of borrowers to whom they have extended credit and which are covered by this scheme. With the growing volume of applications, a system of prior scrutiny of each application could not have worked well. Earlier there was a system under w[ich the guarantee cover was not uniform. It extended from a minimum of 64 per cent to 100 per cent in certain circumstances. This was modified to a system of fixed cover at 75 per cent because it was felt that banks. must carry at all times a specific stake in each loan transaction. It was also felt that a differential guarantee scheme would be difficult to operate. The pr.asent guarantee fee o f one-e.nth'o f one per cent per annum has been in force since Uctober 196a. "Prior to it, it was higher at one-quarter af ona pär cent. The administrative expenses on account of the schemes are borne by the Reserve Bank of India. Oceration of the Scheme Some basir. data relating to the operation of the scheme are; given in Table 3.1. The outstanding guarantees covered increasod from approximately Rs.3 crores in 1960-61 to Rs.2,195 crores in 1976-77. The total amourit of guarantee fee collected since the beginning to the end of 1976-77 was Rs.11 crores and the total claiffopaid was Rs.2 crores. As a resält, the surplus transforred to the government amounted to Rs.9 crorus. It may, however, be noted that the administrative expenses for running this scheme have been borns by the Reserve Bank of India. The claims paid as a ratio of the total guarantee fee paid over the entire period works out to 20 per/cent. In recent year.s this ratio has varied between 12 and 25 per cent. We.have also presented the data on the number of borrowers and amount under default. Loans under< default are on-y potential 182 TABLE 3.1 a OPERATIONS OF THE CREDIT GUARANTEE SCHEME FOR SMALL SCALE INDUSTRIES (Re. in lakha) 1A1 at the Cuaranteo- Not Aduanceo under default Claio) pald on account of Not surplua invocatlon of quarantes accrued to end of' outsýand4no. ARount atf ye a Coimm.tsion No. o f No. o f .No. o f Ne. orfGt yor Amount ) . a ainN. t o j' Amount N.a' o.t' Amount (cumnulat ive (July-JunO . Collectåd unita accounta unita accounta motnth(eumdlat' half ypar) (Cumula- at the and of tivo) u - DO. (Amount) (Amount) (1) (2) (3) (4) (5) (6) (7) (8) (9) .1960-61 277 1 - - 1 1965-66 5242 31 - 66 24 - 60 .9 25 1969-70 63679 153 463 14 - 164. 21 139 1970-71 79097 221 2250 845 - 200 27 201 1971-72 91333 . 297 - 4552 '1433 . - 281 43 262 1972-73 114461 393 - 7424 2170 - 432 67 341 1973-74 149709 522 - 10216 3076 - 871 100 442 1974-75 172600 662 8878 12943 4101 921 1097 128 561 1975-76 194903 . 848 12439 17904 6000 1201 :1444 170 714 1976-77 219500 1100 16275 22940 9100 2239 2598 200 900 Source i H.B.I. Bulletin, Feb. 1977 O 183 claims. Banks are required to report to the credit organisation all cases of default except those which are deemed to be very temporary. Therefore the actual claims to be lodged will be a much smaller proportion of the cases under default because banks lodge claims only when they find that the cases are irrecoverable. Even though,the amount under default is increasing, it still constitutes less than five per cent of the guarantees outstanding. The claims paid as a percentage of the guarantee outstanding is of course very negligible. As per the most recent data atailable,. out of total claims paid of Rs.3.3 crores, the recoveries amount to Rs.60 lakhs. We have presented in Table 3.2 some data that we have been able to collect from onp bank which has .been.:very active in the field of providing credit to small scale. industries,- The credit outstanding against small scale industries in that bank as of a recent data was Rs.110'cires."' If the case of this bank, only about 25 per cent of the total claims had been settlad. The total claims lodged, let alone the claims paid, is a very small percentage of the outstanding credit. 184 TAGLE 3.2 i CLAIMS POSITION IN SANK AS ON MARCH 1978. (Rs. in lakhs) Number Amount of of units claims 1. Claims preferred 375 148.00 t.ass.J Claims rejectad/ withdrawn/ kapt'in abayancm. 42 7.26 2. Claims eligible for settlement 333 140.74 3.. Claims settled s far 154 37.18 (46.25) (26.42) .Clalms, in the pipeline '179 103.56 (53.75) (73.5a) Nots: Figures in brackets indicate the percentage to total Impact of the Scheme The credit guarantee schema in relation to small scale industries has been in operation for 18 years. Regarding this scheme, th6 major c;mplaint as far as the banks are concerned has been in relation to the acceptance and settlement of claims. The credit guarantee organisation is expected to settle the claims within 30 days of the filing of the- claim, provided all . the necessary documents have been filed along with the claim application. However, in practice, it takes a much longer time. It takes on an average six -tonths. The credit guarantee carganisation feels that tho 'cause of the long delay is due to banks not strictly adhering to the conditions laid down in the also guarantee agreement and/their inability to produce all the necessary documents in. time. The head office of a bank deals with the credit guarantee organisation. When a question is raised by the credit guarantee organisation regarding a disputed point, the head: office makes a reference in turn to its regional office which then-passes it on to the concerned branch' from which the loan had been granted. Obviously all of these lead to protracted delay, One of the banks in its internal document had accepted that' the delay- arises because of the centralisation of this activity result'ing in lengthy correspondence between the head office and the branches and regional offices. It is also ' 186 admitted that lapses on the part of the branches in relation to the scheme contribute to the diay. Apart from the physical time taken in answering the questions raised, thero have also been disputes between banks and the credit guarantee organisation on the interpretation of certain clauses. Since no prior authorisation of the guarantee is now required, sometimes at tho time of lodgment of claims, questions have been raised whether the unit to which the bank has granted credit comes under the definition of small scale unit. Sorme o f the other issues.on which disputes have risen are (a) inclusion of overdue interest in the amount of default, (b) control to be exercised on the end-usa of funds lent to the borrowers, (c) determination of the amount guaranteed in relation to a particular borrower and (d) acceptance of compromise proposals in the court. Overdue interest is allowed to be included as part of the amount at default. However, the problem arises at what point the further charging of interest should be dispensed with. A claim is admissible only if the borrower has utilised the funds for the purpose for which the loan was granted. While banks are also concerned with the end-use of credit, they find it difficult to monitor every withdrawal to see whether the borrowed amount is being utilised only for the purpose for which it has been granted. This is particularly found to be difficult in the case of working 187' capital advances. So disputes have risen between banks and the credit guarantee organisation an the extent and care which banks have to bestow on monitoring the end-use of credit. Sometimes d,'putes have risen in determining the credit outstanding against a particular account. This arises puroly out of the reporting procedure followed. While under the scheme the guarantee amount is treated as the amount given in the statement filed the quarter previous to the lodgment of claim' sometimes banks find that some additional crpdit has been granted after the filing of the quarterly report. Under the schema accaptance of any compromise proposal roquires -the prior'approval of the guarantee organisation. However, in a number of cases the banks 're required to take prompt decisions on such compromise proposals especially when they have filed a suit in the court. Disputes have therefore risen between banks and the guarantee organisation on the approval Of such compromise proposals by the guarantee organisation. Thus by and large, the differences have centred round the approval and acceptance- of claims. Since claim settlment is an important part of the guarantee schemo, all efforts should be made to simplify and streamline the procedure relating to it. The credit guarantee organisation is currently- examining the idea of intra- ducing automatic settlement of claims in the case of accounts below a certain amount. In the absence of speedy settlement of 188 claims, tho very purpose of the scheme can be defeated even if one accepts in principle the need for such a scheme. There are some basic issues that arise in relation to the operation of the credit guarantee scheme. The first question is whether the introduction of the credit guarantee scheme has contributed to an increased flow of credit to small scale industries. rt is difficult in give a categorical answer to T this question. he. introduction of the credit guarantee scheme also marked the beginning of provision of credit to small scale industries by banks. Therefore, there is no way of comparing tho rate of growth in advances to small scale industries during tho paricd in which there was no insurance cover with a period in which there was insurance cover. The policy decisions have much to do with the increasing role of banks in'providing credit to small scale industries. It will therefore be wrong to attribute the increased credit t small scale industries only to the credit guarantee scheme. However, our discussions uith.various commercial banks have shown that banks do consider the insurance cover as a good institutional support. Branch managers feel better because of the existence of this cover. We were told that with the introduction of credit guarantee scheme, insistence on third-party guarantees had been given up which in itself was a great advantage to the borrowers. The impression that one has gained from talking to the bankers is that the existence of such a schema has had a favourable psychological effect on branch fianagers in providing credit to small scale industries. The second question that arises in this context Is whether the individual banks themselves could not have managed this through the creation of a reserve fund within the bank This argument largely stems from the fact that the claims paid.so far have boen a very small proportion of the total guarantae 'fee paid. As mentioned previously, as against the total guarantee fee collected up to the end of 1966-67 of Rs.11 crores, the claims paid 'has amounted only to Rs.2 crores. Fr`om the limited-amount of claim settled, ano can infer that there is no bank where the guarantee fee paid is loss than the claims paid. After all tho need for insurance arises only when there are some cases where the premium paid is less than the claim settled. Given the fact that there are only a limited number of banks, it can well be argued that each bank has enough diversity to take care of this insurance cover within itself. Based on past experiences this may well be true, But data available as of a very recent date seem to indicate the situation may be fast changing. As at the and of June 1977, the total amount of cradit guarantee fee collected since its inception was Ra.11 crores. As at the and of ecember 1977, the corresponding figure is Rs.12 crares. The total clainms paid. till 'une 1977 was Rs.2 croes and the total claims paid by the end of December 1977 was R.3' crares. *These data show that the claims paid during the half year'- beginning June 1977 has been Rs.1 crare and it is just equal to the commission collected during this period. As at the end of "une 1977,. the total amount of advances, under default was Ras.91 crores. Preliminary-data available with the credit guarantee organisation irdicata that they have risen to-Ra.127 crores by Zune 1978. As 'indicated earlier the advances under default are not the same as the claims lodged. However, it is felt that eventually claims to the extent of Rs.30 croes inight be lodged. If this turns 'ut to be true then the guarantee fee collected'might not even be adequate to pay the claims. A related question is whether the guarantee -fee carged is high and whether' he fee is being borne by the borowem or the banks. It is agreed on all. hands that a fee of one-tenth of one per cent on outstanding amount is not heavy. In the Export Credit and Guarantee Corporation, for the whole turnover packing credit guarantee under which pre-shipment advances of S191 -.banks are covered, the extent of guarantee is 75 per cent and the fee works out to 0.4 of one per cent per annum. There is no uniform practice among banks regarding as to who should bear the cost of insurance. In the case of the State Sank of India, the premium amount is borne by the bank for all small loans. Even assuming that the cost is passed on to the borrower, at the present level of insurance premium the cost is not high. However, one point that was nads earlier may be noted in this context. There is a limit on the loss to be borna by the guarantee organisation in respect of term loars and working capital advances. However, the fee is collected on the total amount outstanding. While examining the cost of the credit guarantec scheme, it may be pertinent to point out that the total cast is not just the insurance premium paid. The administrative expenses of the crodit guarantee organisation are quito large. The working group set up to study the credit guaraneo in 1970 estimated that tho administrative expenses of the credit guarantee organisation would amount to Rs.30 lakhs per. annum. A recent estimate puts it at Rs.1 crors. It may look somewhat incredible that for disbursing claims to the tune of Rs.1 core, an administrative expense of equivalent amount has to be incurred; .At present the administrative expenses incurred in running-this scheme are being borne by the Reserve 192 Bank of India. It nevertheless is a cost to the society. The commercial banks also maintain departments to process the cases A under default, to lodge claims and to give replicas to the credit guarantee organisation. One should not be surprised that if all the banks put togdther incur expenses equivalent to what the credit guarantee organisation is incurring on its administrative expenses. These expenses, one way or the other, will be passed on to borrowers in general if not directly to small scale industry borrowers. CREDIT GUARANTEE TO SMALL BORROWERS While the need to 'extend bank credit to small scale industries had been recognised since the beginning of 1960s, it was only after the introduction of the Social Control on banks in 1968 and more particularly the nationalisation of 14 commercial banks in 1969 that an increased emphasis was placed on credit to agriculture and other neglected sectors. As in the case of small scale industries, it was felt necessary that there should be an appropriate insurance scheme to cover bank credit to small borrowers. The Credit Guarantee Corporation was set up in 3anuary 1971 in order to provide this insuranco cover. In spirit as well as in details the schemd operated by the Credit Guarantee Corporation of India . ' are similar to the credit guarantee scheme for small scale industries discussed earlier. Details 6f the Scheme The primary purpose of the Credit Guarantee Corporation was * to provide guarantees to banks with respect to their advances to farmers and agriculturists and other specified small borrowers. .In addition to commercial banks, the scheme is open to co-operative banks, regional rural banks and other specified financial institutions. The Corporation has defined the loans covered by it in terms of the categories of borrowers, the eligible purpose and ceiling limits, if any, on the credit facilities. At present the Corporation operates three types of schemes. These are: 1. Small Loans Guarantee Scheme under which guarantee is provided to banks in relation to eligible loans to specified sectors. 2. Small Loans (Financial Corporations) Guarantee Scheme under which guarantee is provided to state financial corporations. 3. Credit Guarantee (Service. Co-operative Society) Scheme under which guarantees are extended to banks in providing credit to Service - -' Co-operative Societies which may be assisting workers, artisans and other selif-employed-. persons engaged in industrial activity.. Under the small. loans guarantee scheme, protection is given to banks in relation to the loans granted to farmers and 194 agriculturists, small transport dperators, small retail traders, small business anterprises and pro fessionals and self-employed persons. The detalls regard ing the type o f loan facility covered, 'ciling limits and other particulars are provided in Table 3.3. The Credit Guarantee Corporation indemnifies 75 per cent of the amount af loss incurred by a bank in granting credit to catagorios of borrowers specified in the various schemes. Thers is, however, In most cases an absolute ceiling on the losses to be borne by the Coi-poration. For example', in the case a f cro'p loans to agricuL.ture, th,3 cailing is Rs.2,500. In the case of ter loans, the ceiling is Rs.10,000. Banks aro required to cover the loans granted to all the borrowers coming under the insurance scheme.* This is similar to the condition laid down in the case of credit guarantae scheme in relation to smell scale industries. In terms of sharing the loss, there is a slight difference between the credit guarantae scheme in relation to small scale industries and the schemes operated by the Credlt Guarantee Crporation. In the. latter case, 75 per cent of the *An exemption is granted to certain small scheduled and non- scheduled commercial banks from covering their advances against gold and silver ornaments. The main reason for granting exemption is that in the case of some banks such loans constitute quite a large proportion and therefore their capacity to bear guarantee fee was low. However, this exemption is reexamin-d by the Corporation every tLo years. 195 TABLE 3.3 : ELIGIBLE SCHEMES UNDER SMALL LOANS GUARANTEE SCHEME Category of borrowers Eligible purpose and ceiling limits for Corporation's liability credit facilities9 annual sales turnover br* briginal cost price of equipment I .Farmers & . 1. Seasonal agricultural operations 75% of amount of loss or As. 2,500 agriculturists . whichever is lower 2. Land reclan)ation, construction or deepening 75% of amount of loss or R9. .10,000 whichever is-lower. 3. Conversion of short-term loans into long- 75% of amount of loss or Rs. 5,000 term loans due, to drought etc. whichever is lower. 4. For pisciculture 75% c:f the amount of loss or Rs.37,500 whichovet is lower. 5. Sericulture . 75% of the arqount of loss or As.18,750 whichever ie- lower. -- 6. Animal.husbandry 75% of the amount of loss or s.15,000, whichever is lower. 7. Poultry . 75% of the amount of loss or Rs.22,000, whichever is lower. 8. Dairy 75% of the amount of loss or-Rs.15,000, whichever is lowor. II Small transport For financing an individual or an association of 75% of the amount of loss operators .. not more than six indfvidt1ils owning and operat- ing a single transport vehicle. Loan limit not exceed Rs. 5 lakhs III Small retail Annual turn-over not expeeding As. 4.00 lakhs 75% of the loss or As. 15,00 tarwhichever is lower. IV Primary-dealers Annual turn-over not exceeding Rs. 10,00,000 75 of the loss or As. 75,000 in fortitpors % owhtiche lor is lower and Mineral Oil dealers . 196 Tablo 3.3 (contd.) Professional apd 1, Medical practitioner, including a dentist, or 75% of .the loss -self-omaloyed firm of medical practitionors owning or pos pestablishing a nursery home or clinic Rs.1,00,000. persons 2. Engineoring Consuitants or Architocts Rs.50, 000 do 3. Any other- person skilled in his profession, whether ha holds any professional or tochnical degree nr diploma or not. Os. 20,000. do lusines entkrprisos All cases where original cost prico of equipnent usod 76% of the loss or does not excoed Rs. 1,50,000. RE.50,000 whichevor is lower. VII Rosidual catogory of For financing an individual or any association of 75% of tho-loss borrowers under the- persons. E)iffcjrQntlil Intereat Rate schclte Loan limit of Rs.1,500 for working capital and Rs.5,000 for any other purpose. VIII All catogorieu mFrtioned 1. ` For consumption needs undör I to VIT (ak) Medical Expenses Rs. 250 per year 75 of the loss (b) Education expenses s. 100 per year (c) Expenses on marriages- Ra. 250 par year (d) Exponses on funerals anct births RAs.. 75 per year -() Expenses on other religinus - ceremonios fls. 75 por year 2. For purchase or construction or house or tenement R6.5,000 75% of the loss 197 loss is indemnified. This implies that banks come to the Credit Guarantee Corporation after they have exhausted all their remedies to recover the loan. But in the case of the guarantee scheme relating to small scale. industries, as we have pointed out earlier, banks can claim the amount even before taking legal action. To ensure that the scheme goes to the benefit of the small borrowers, two types of devices have been adopted. In the case of some categories of borrowers such as transport operators, a limit has been set an the amount of an individual loan. Transport operators who receive credit facilities above this limit are not 4 covered. by the scheme. Similarly in the case of retail traders, a limit has boen set on the annual turnover. But in the case of certain other typos o f loans such as those to farmers and agri-. culturists, no limit is set on the credit facilities- provided. Prior to 1972 there was a limit fixed on the va-lue of individual loans granted to farmers and agriculturists. This limit has been withdrawn and now a limit has been set on the amount of loss that would be borne by,the Corporation on each loan.* In addition, when loans for more than one purpose are granted to a *It is more logical to fix a eling limit on the credit limit than on the loss. Perhaps the Corporation has preferred to go for a ceiling on the loss because this way it can callect more guarantee fee. farme or an griculturistà, there is a total limit on the loss ta be borne by the Czrpor.ation on all loans taken together. The guarant4e fee payable is. equa-i to one-half of one per cent per annum on outstandin. debit balance. As in the case of cre'dit guarantae scheme applicable to small scale industriUs, prior approval of the Corporation is not neaded in relation to every borrower. The bank has to submit only periodic statements containing the borrowers to whom credit has been extended. qver the years, the various schemes operated by the Corporation have been amendad to anlarge their scpe and benefits. When the differential intarest rate scheme was introduccd, lo-are granted under this scheme were also included in the coverage. During 1976 advances for consumption needs and· fr purchase or construction of houses were ålso included. The ceiling for eligible crådit ftcility has been raised in relation to several categories from time to time. The maximum period of repayment of term loans for agriculture has recently been *extended from 10 years to 15 yaars. Operation of the Scheme As at the er d cf 1.977, the. riumber o f s.cheduled commercial banks participati'g in the small `loan guarant3e scheme was 121. 199 In 1971, when the Corporation was set up, the number of commercial banks participating was-71. The total facilities guaranteed by the Corporation have shåwn a sharp rise in the past several years. Table 3*4 pro.vides th~~ qdit guaranteed by the Corpo.ration undr ..-the various schemäs. BtDd-n June 1973 and 1977, the credit facilities'guaranteed increased fourfold from Rs.335 crores to R.s.1,308 crores. 'Credit to farmers and agriculturists constitutes the largqst singlä sector"covered. It represented 65 per cent af the total credit granted in 1977. The next important sector covered is transport operators representing 15 per cent of the total credit guarantead. • Guarantees under the financia.F" corporations scheme provided by service and service co-operative societie.s--scheme account for a very small proportion of the total guarcntees. In March 1977, the total amount of bank credit going to priority sectort other than small-scale industries was Rs.1,972 crores. Thus the credit guaranteed by the Corporation constitutes 65 per cent of the credit to priority .sectors other than small scale industries. Thus - substantial proportion of the credit to priority sectors is now covered by the Crdit Guarantee Corporation. One of the' reasons for the exclusion of some part of the credit going to the priority sectors is because of the 200 TABLE 3.4 : SECTORUISE 0ISTRISUTION OF CREDIT FACILITIES GUR,NTEED BY THE CREDIT GUARANTEE CORPORATION (Ras. in crores) As on the last Friday Of 3une Sector 1973 1974 1975 1976 1977 I. SMALL LOANS GUARANTEE SCHEME 1. Transport operators 40.96 58.58 80.17 147.67 199.69 2. Traders in goods other than fertilisers or mineral oils 41.02 53.99 60.24 83.90 120.6 3. Traders in Fertilisers or mineral oils 3.54 7.17 .10.97 14.22 13.96 4. Professional and self- employed persons 18.04 28.87 .35.01 50.31 67.77 5. Business enterprises 10.58 15.00 19.33 33.22 45.21 6. Farme.rs and Agricul.tur±sts 220.88 306.71 432.18 645.91 840.91 7. Residual category of borrowers under the Differen- tial Interest Rates Scheme 0.37 1.14 4.03 9.95 19.98 335.39 471.46 641.93 955.18 1308.39 II. FINANCIAL CORPOR6TIONS GUA fRNTEE SCHE 1. Transport operntors 2.59 2.6a 2.71 3.35 6.79 2. Business enterprises 0.19 0.19 0.26 0.26 0.61 2.78 2.87 2.97 3,61 7.40 . SERVICE CO-OPERATIVE SOCIETIES GUARANTEE SCHE Service Co-operative Socigties 0.56 0.75 0.18 0.29 0.19 TOTAL GUARANTEED #ÅVPiNCES UNDER ALL THE THREE STAGES 33:8.75 475.08 645.08 989.08 1315.98 201 eligibility requirements and other conditions imposed by the Corporation. Table 3.5 provides statewise distribution of facilities granted-under small loans guarantees schema. As is to be expected, the major states covered are the ones where credit to agriculture has been dominant. In 1976 Andhra Pradesh, Karnataka, Maharashtra and Tamil Nadu were the states where credit facilities covered were in excess of Rs.100 crpres. Table 3.6 provides distribution of loans guaranteod according to the groups of banks. Since the nationalised banks including the State Bank constitute the dominant segment of the banking system credit granted by them is tho most important part of the loans guaranteed. However, with Miore and more of other scheduled banks joining the Corporation, their share is. showing an increase. Tablo 3.7 shows the claims pre ferred on the Corporation and the claims paid. Up. to the end of 1976, the total claims paid by the Corporation was approximately R.58 lakhs. The total .claims paid during 1977 was Rs.236 lakhs, thus bringing the total claims paid so far to Rs.3 crores. There has been a sharp rise in the total claims lodged and also -the claims paid duking 1977. 202 TABLE 3.5 : STATEWISE DISTRIBUTION OF CREDIT FACILITIES GUARANTEED SY THE CREDIT GUARANTEE CORPORATION (Rs. in crcres) As on Friday a f June Stats 1974 1975 1976 1. Andhra Pradesh 38.67 61.30 116.96 2. Assam , 5.46 7.20 10.78 3.. Sihar 21,.84 33.43 49.98 4. Gujarat 46.64 52.78 6d.1.7 5.. Haryana 9.0 12.78 22.74 6. .. Himachal Pradash 1.72 2.61 4.2 7.. Jammu & Kashmir 3.62 3.85 6.54 8. Karnataka 44.71 64.48 110.24 9. Karala - 15.64 27.29 46.48 10. Madahya Pradash 22.36 35.35 55.43 11. Maharashtra 79.47 98.98 130.02 12. Måghalaya 0.53 0.74 1.12 13* Nagaland 0.16 0.17 0.30 14.. Orissa 5.75 6.90 15.43 15. Punjab 18.89 2t.66 41.17 16. Rajasthan . 19.28 25.1 , 35.86 17. Tamil. Nadu 42.48 65.34 111.97 18. Uttar Pradpesh 40.44 59.76 79.59 19. West Bengal 30.05 36.06 55.08 20. Union Territorias 12.23 14.8 22.48 TOTAL 459.56 632.42 985.18 203 TABLE 3.5 a BANK GROUPWSE DISTRIEUTION OF CREDIT FACILITIES GUARANTEED BY THE CREDIT GUARANTEE CORPORATION (Rs. in orores) As on the last Friday of June 1974 1975 1976 1. State Bank of India 115.76 . 178.91 287.28 and its subsidia;ries 2. Nationalised banks 320.64 424.63 635.56 3.1 Fdei'gn sched.uled -banks 0..20' 0.29 0.16 4.- Other Indian scheduled 22.86 28.10 62.10 banks 5. 'Non-scheduled banks 0.10 0.59 1.37 6. Regional rural banks - 0.71 _TOTAL 459.56 632.42 985.18 204 TABLE 3.7 RECEPr AND DISPOSAL OF CLAIMS BY THE CREDIT GURRANTEE CORPORATION (Rs. In 1.akhi3) Of the claima disposed of Claima Claima Claima Claima Claimna received dieposed of paid withdrawn rejected No. Amount No. unount No. Amount No. Amount No Amoun Upto the and of 1974 1,037 32.87 121 4.09 31 1.19 62 1.36 28 1.54 During 1975 1,738 60.16 294 7.05 179 4.26 67 1.09 48 1.70 During 1976 4,031 .134.01 2,114 59.06 1,927 52,24 101 3.47 06 3.35 6,806 227.64 2,529 70,20 2,137 57.69 230 5.92 162 6.59 During 1977 14,832 '441.54. 9,881 259.87 9,469 236.10 193 7.39 219 16.38 TOTAL 21,638 669.38 12,410 330.07 11,606 293.79 423 13.31 381 22.97 205 The total guarantee fse received during 1977 was Rs.677 lakhs. Thus the claims paid amounted to 30 per cent of the premium paid during the year. In fact the interest income earned on investment made by 1he Corporation during the year came to As.122 lakhs. Therefore 50 per cent of what was paid in the form of claims, could be paid out of the interest income. Since the setting up,of the Corporation, the total guarantee fee collected has been of the order of Rs.20 croraes and the total claims settled. at Rs.3 ,croros constitute 15 per cent of the fee collected. One of. the banks whose total credit outstanding against priority sectors other than small industries was of the order of As.100 crares gave .us some data regarding the claims lodged and paid to them. In this bank, up to the and of June 1978, the total claims lodged amounted to Rs.121 lakhs and clairbs settled amounted to Rs.72 lakhs. This bank had paid a total guarantee fee of Rs.151 lakhs. Thus claims settled so far amounted to 50 per cent of the premium paid by the- bank. Some Basic Issues As in the case of credit guarantee scheme covering. small scale industries, the fundamental queston to be raised with 20 6 respect to 'thc Credit Guarantee Corporation is whether the introduction of the credit guarantee scheme in relation to small borrowers has resulted in an increased flow of bank credit to these sectors. It is difficult to maintain that the insurance scheme as such has induced banks to provide large credit to agriculture ard other small borrowers. Increased credit to priority sectors had become part of the policy. It may,be noted that in Ouna 1969 the credit outstanding against agri- culture was Rs.188 crates and by 3une 1971 it had become Rs.382 croes. Thus even before the introduction of the credit guarantoo schemo relating to agriculture, credit to agriculture has picked up considerably. Etween 1959 and 1971, the credit outstanding had doubled. Therefore credit insurance is not the major motivating factor behind the enlarged credit to these sectors. However, our discussions with a large number of bank officials cloarly indicate that they regard insurance cover in relation to small borrowers as even more important than the cover given in the case of small scale industries. Three reasons are given for this. (I) Credit to agriculture was an entirely new experience to banks. Until 1968, bulk of the credit to agri- culture was given to coffee and tea plantations. Sanks consider providing credit to small borrowers in agriculture as a high risk area. (2). Agriculture is subject to the vicissitudes of 207 .natur. ..Drought or floods can affect seriously the recovery of .oans (3). .inge,.bulk bf the loans to agriculture is for small borrowers-and. since the landing is based upon production require- ments rather than on security, once the borrower defaults, there is- no .way of recovering the money. There is no security on which to- fa1l back upon.*' All those three factors are stressed to point out that banks require protection by way of credit insurance. One related issue that arises is whether the guarantee fee charged is too burdensome. The guarantee fee under the Credit Guarantee Corporation is'higher than the guarantee fe'e charged in relation to small scale industries. Banks do not regard the fee as burdensome. However, the claims' experience so far has been that the Corporation has.been able to build up sufficient reserves. The reserves of the Corporation as at the end of 1977 was Rs.20 crores. The total claims settled so far has-been only Rs.3 crores. The Corporation has been able to recover Rs.11.73 lakhe. Even during the current year where the Corporation has paid out large claims, it still works out to 30 per cent of the 0It may be noted in this context, recoveries as .a ratio of claims paid by the Guarantee Corporation was four pgr cent. In .the case of credit guarantee to small, scale industries, the ratio of recoveries to claims paid is I8 per cent.. 208 guarantee fae paid. But it does appoar that in the case of some banks., the claims paid may be a sizeable proportion of the guarantee fee paid. One of the bank of ficials pointed out that something like the cyclone that hit Andhra Pradesh a few years ago would have ruined some of the banks concentrated in- that region but for the credit guarantee scheme relating to small borrowers. The claims lodged increased from Rs.1.34 crores in 1975 to Ra.4.41 crores in 1977. So while the guarantee fee collected and the claims paid do indicate a wide difference. between the two so far, in future these differences may narrow. Thus an insurance scheme of this type may therefore be considered necessary. The present practice is that banks absorb the guarantee fee paid and there fore the cost to the borrower is not affected. While the insurance fee as a percentage of the outstanding balance is small, in absolute imount this can be sizeable in some o f the banks where priority sector landing is very dominant. The' operating cost of the Credit Guarantee Corporation ap eas to be much..lower compared to the credit guarantee scheme in relation to small scale industries. From the pro fit and loss account o f the Credit Guarantee Corpor'ation for the year. 1977, it is seen that the administrative expenses amounted to Ra.17 lakhs. 209 : ' SUMMARY -The. cridit guavantee scheme. for covering bank credit to small scale industries was,introduced in 1960 and the Credit Guarantee Corporation to give protection to banks with respect to their advances to agriculture and other small borrowers was set up in 1971. The basic purpose underlying these two insurance schemes is the same. It is to enlarge the flow of bank credit to small scale industries, agriculture and other small borrowers. Since lending to these sectors was a new experience as far as banks were concerned and since lending particularly to agriculture was subject to the risks arising from the vagaries of nature, it was felt necessary to set up insurance schemes that will protect banks from losses that they may suffer in lending to these sectors. Under both these schemes banks are indemnified up to 75 per cent of the loss they may incur because of the default of the borrowers; Banks will still have to bear 25 per cent of the loss. .Under both the schemes, the entire credit 'extended by- banks to 'small scale induatr±es and to. agriculture and other-'specified borrowers is to be- covered. The guarantee . . .. .... ... 210 fee in the case of small scale industries is one-tenth of one per cent whereas in the case of agricultu.re and other small borrowers,- it is one-fourth of one per cent. Over the years, both the schemes have been amended and enlarged to make them more flexible and beneficial to banks. The experience with respect to both these schemes shows that until now the claims paid is a small proportion of the total guarantee fee collected. In the case of credit guarantee scheme for small scale industries, the ratio is 20 per cent and in the case of the Credit Guarantes Corporation, it is 14 per cent. The recoveries as a ratio -of claims has, however, been larger in the case of small scala industries than-in relation to agriculture and other small borrowers. One basic quastion that arises in relation to both these schemes is whether the introduction af the insurance cover has had the affect of anlarging the flow of credit to these priority seotors. it is difficult to maintain that the insurance schemes by themselves have been responsible for the increased credit to these sectors. Bank credit to priority- sectors ias shown a sharp: rise during the past seven years. This has been ma4nly due to the policy decisions of the government. However, our discussions with many bank afficials have shown -that the 211 existence of insuranco cover has had a favourable psychologicl effect on branch managors. One related question is whether the banks themselves could have introduced a type of self-insurance becauso the claims paid so far have been a small proportion of the total guarantee fee collected in all banks. This is true of the past. This may not necessarily be so in the future,. In the case of both schemes, the claims lodged have been increas- ing in recent years. In the years to come the differences between the guarantee fee collected and the claims paid are likely to get narrowed. As far as cost is concerned, in the case of small borrowers, the fee is borne by the banks. Thus the cost of borrowing as far as small borrowers is concerned is not affected by the introduction of these schemes. However, for 'the banking .system as a whole, there is an additional cost which at the present rates of premium, is not high. Howover, in computing the total cost to the economy, we naed to add the administrative expenses borne by the guarantee organisations and the banks themselves. Chaptjr 4 NEW APPROACHES TO LENOING In relation to growth of financial institutions, it is usual to distinguish between two types of situations - 'demand following and supply leading'. In the former case, financial institutions come into existence as a result of the demand for such services arising from investors and savers and in the latter case the financial institutions precede such demand and in fact become responsible for creating such a demand. In requiring banks to go into rural areas and to provide credit to priority sectors, banks were performing both these roles. They were partly catering to #4 the demand for credit that actually existed and they were also creating the demand fdr credit particularly among lower income groups. For the purpose of lending to people in the rural and semi-urban areas, it became necessary for the banks to explore new approaches. One such new approach was the area approach which meant idantifying credit gaps in specific areas and providing integrated banking facilities. This approach led to such action programmes as the formulation of district credit plans and village adoption schemes. Pnother approach was to introduce credit schemes specially designed to meet the requirements of the weaker sections. ._In this chapter we examine somo of the(2 steps taken .by banks recently to widen the sct,pe of their lending in rural areas,and assess their contribution. 213 CISTRICT CREDIT PLANS The arga approach to the development of credit and banking In.the country was. first. mooted by the Gadgil Study Group of the National Credit Council in 1968. The central idea behind this scheme was that banks should choose specific aroas and involve themselves deuply in the development of those areas. Tho luad bank scheme formulated towards the end of 1969 gave concrete shape to the area approach. Under this scheme all the districta in the country except the metropolitan cities and the union territories wera allocated emong. all public sector banks and a few banks in the privata sector for intensive development. The allocations were made on the basis of certain critoria like the resource-base of the bcnk, tin geographical contiguity and the desirability of having mor than cne luad bank In each state as also.. each bank - having lead responsibility in more than one state; The role o f the lead bank was to :e that of a consortium leader. The lead bank was not to have the monopoly of banking business in its lead districts. Ncr was the district development the solo rosponsibility of the lead bank.. The luad bank was to identify• through surveys the areas requiring branch expansion and areas and. sectors suffering from credit gaps. They .were to invoke the ccoperation of other banks operating in the district in the task of.mobiLtsing deposits and providing credit. The first task entrusted to the 214. lead banks was to identify the growth- centres considered suitable fo-r branch opening. Subsequently in the second phase of the scheme, lead banks were required to formulate comprehensive district credit plans which would not only identify the credit gaps but also formulate schemes for providing credit which would exploit fully the forward and backward linkages. Thus the formulation of district credit plans was the first effective step taken for translating the area approach to action programme. Obiectives of District Crodit Plans As mentioned previously, the purposa of the district credit plarr is to identify and bring together a set of integrated schemes that can be. financed by banks and other institutions. Obviously the district plan is not the same thing as the development plan of a district. The latter is more comprehensive then the former. T he district development plan will normally judge projects to be included for development on the basis o f' the social cost-bene fit analysis. On the other hand, the.district credit plan attempts to put together a sat of technical ly feasible and economicaly viable schemes which can be taken up by the financial institutions operat-' ing in a district.. Since our planning process is still not fully geared to perform the task at the district level-, the lead banks have to assess first the resource endowment and potcntial for 21s growth in their districts and prepare accordingly the credit plans fZr the districts. It is true that the resource endowment can be exploited for development inly if additions are made to infra- structure facilities such as power supply and road. The expansion of'infrastructure facilities is outside the control of lending institutions. Thus the credit -plan has to include economically viable schemes within the existing or marginally strengthened framework of infrastructure facilities. At bast the infrastructure gaps can be identified in the process of preparatilon of credit plans and this will perhaps help the governmental authorities. Preoaration of District Credit Plans A typical credit plan for'a district contains the following information and analysis: 1. Based on the data drawn from the government sources and other publishod materials, the availability of natural resources, cropping patterns and existing industrial development are analysed, The agro-climatic soil conditions level of input use and overall development of agriculture. are also discussed. 2. The avai;able data are also used to analyse the past development and Future development prospects of the various sectors in the . district. 3. The development activities undertaken by various other agencias are also briefly discussad. 216 4. The credit requirements arc then estimated and projected by using highly simplified method4. The credit requirement for agri- cultural operations, for example, are. estimated by examining the existing cropping pattern and multiplying the acreage under each crop by an ostimated credit requirement per hectare. 5. Credit requiroments for each of the sub- sectors (primary, secondary and tertiary) are estimated in exactly the same fashion and consolidated statements of credit requirements for all sectors are prepared. 6. Based on these estimates of credit.require- ments, 'action plan' is designed which among other things projects the deposit mobilisation in,the district (usually by trend method), and attempts a comparison of credit require- ments and deposit mobilisation. Then the action plan goas on to describe the critsria an which the shares of various commercial ba6ks in mooting the total credit gap have been decided. At the end of the report, some credit schemes are also discussed briefly an, the economics (mainly proforma income statements) of some of the major schemes that arp to be taken up for financing is given. Role and Usefulnoss of District Credit Plans By July 1977 banks had prepared credit plans for 163 districts.. They wore expected to-complete the plans for the remaining 212 d-stricts by the middle of 1978. In order to understand the role and usefulness of distriet credit plans, we analysed six selected credit plans. These six credit plans are for Bijapur 217• (Syndicata Sank),.. Anantnag (Stato Sank of India), Vadodar.a (Sank of Sarada), Mathura (Syndicata Sank), Pudukottal (Indian Overseas Bank), and. Varnasi (Union. Sank cf India). Wo have given in Appondix 1 a rcview cf the contants of these plans. In Appendix 2 we have indicated somG cf the special f3atur,3s attempted by th various plans.. A survey of all thesc p.ans clearly indicates that wh±ile those plans contain a lot of intercsting and use ful background matorial, thcy do not provide a 'clear basis for the extension of cr2dit. All.tha plans'containad a'comprehensive riviow of the matural resourcas basec on secondary data. Only a few plans had indepth stuiies at villdga level or at block levol. Not all: plans also identified the key sectors to be deve- lopad. The assumptions made in arriving at por unit crdit noeds were not spelled out* in detail. rlo-st of thc plans have presentad proforma income statements for projects which ag,in are not very datailed. A ccmmitteo appointed by tha Rosarve Sank of India which went into the quostion of the evaluation of credit schemes nad' this comment to mako on the district cradit plans. "ore significantly the eonomics of credit schemes given in a large number of district credit plans seeme to be based on rathar unrealistic assumptions with respect to the impact a f credit schemea on intensity of land cultivation, :hanges in the eropping pattorn, yields of crops, birds and animals etc. Hence far for:- mulation of credit schemes thay are only indicativo in nature."* *Rasørva Bank of India, RGoort of the Excert Grzuo on _Aoiculturl Credit Schomes of Commercial 8anks, 1978, p.19 218 A meaningful district cFedit plan should aim at (1) bringing about linkages in various interrelated activities, (2) dovetailing credit schemes with development efforts and (3) ptoviding credit in a phased manner to all potential borrowers. While undoubtedly these considerations have influenced the formulation of district credit plans, they have not evolved specific schemes which will fulfil these goals. The district credit plans are far too general to be put into direct action. Banks have not even exploited the internal data available with them in order to establish the forward and backward linkages. Obviously only a lending programma which encompasses a large number of borrowers in a specific area can fulfil the role of taking care of such linkages. Another weakness of the district credit plans as formulated now is that many of the schemes that are prepared are supply-based. When a raw material is available in a particular place, it is automatically assumed that activitiQs basad on exploiting such natural resource should be encouraged. The question, however, of thc demand for such a product is not adequately enqdired id{o. , The concapt of adistrict credit plan is valid and useful. it enabls the banks to under- stand and appreciate the broader cntoxt in which they are operating. But, however, the district credit plans as they are being currently f6rmulated can no more than serve the purpose of providing a basis for further analysis and action. They do not provida. a set of viable credit schemss which mutually support each other and which can be taken up immodiately. VILLAGE AQOPTION SCHEME The introduction of the village adoption schem was yst another application of the area åpproach. The experinnce gained by the commrcial banks in financing agriculturist3 in the initial years after tionalisation brought about the fact that it would be difficult for them to financo agriculturists scattored in the far-away villages from the bronch offices bocause of the difficulty of supervision. It was, thuroforo, considered necassary that banks should concentrata on compact aroas with intensive programmes.. Tho basic idea behind the villago adoption scheme was to 'aaturtal lndividual villages rathor thcn spreading the afforts thin. As in the case a f district crodit plans, tho village adoption scheme was also 'axpocted to lead to an integrative approach in lending. It was also hopad that by ambracing a whola villago, the wesker sections af the community wculd bo helpod better. Villace Selection and Formulation of Schamns In the selection of a village for adoption, the following guido.iines were usually followed by banks: 1. The villago should be preferably within a radius of 15 km or at a manageablo distance frim the branch office of the bank and should be accessiblo throughout the year.. 220 2. Assured sourcos of irrigation and possibilities of introducing multiple cropping should fexist in the village. 3. Large credit gaps exist. 4. -Necessdry. infrastructure facilities for bringing rapid and intensive ag.icultural development such- as road-s,: transport, electricity, communica- tions, processing, storpge ,.availability of inputs, etc. should have developed as far as possible. 5. The villages which are vulnerable to famine, flood and other natural caLamities should not be selected.. 6. Progressive outlook df the farm sin terms of availing of the bank's loars on one hand and the adoption of new technology for increasing income on the other should exist. 7. Favourabla attitudes of borrowers far repayment of bank's loars in time should exist. 8. Marketing facilitics for agricultural inputs and outputs should exist or can bo promoted. While villages satisfying all these criteria would be the ideal villages where the impact would be ihe greatest, it was not the intention that only such v.llages should be selected. After all thd 'potential' factors arc equally important. Banks cannot be rchange agents' if all tho favourable factors are already present. After having sciected the villages to be adopted, the next step was to collect detailed data on various aspects and formulate bankable schemes for introducing them in these villages. This 221 step included the following tasks of identify.ing (1) activitias which could~be financed, by the bank, (2) natura of the financial assistance required, (3) quantum of financial assistancs,. (4) margin requi,rvments, (5) rata of intercst to bo charged, (6) so.curity and documents to be complated,. (7) disbursement schedule, (8) mode of supervision and follow-up and (9) recovery and repayment schedule. The activities which could be financed by th3 bank in the selected villagos included: (a) production of foodgrai.ns, (b) production of cash crops, (c) devoloping minor irrigation facilities, (d) purchase of machinerios and inplaments for farm mechan-isation, (a) poultry, (f) dairy, (g) fishories, (h) grapee and banan* cultivation, (i) fortilizer marketing, (j) agro-custom servica'units and (k) storego and process, etc. In this way, th. new strategy of londing under village adoption schema offared many opportunities for vartical and horizontal integration of credit noeds of adoptud villages. Cach scheme to bo introduced was to include the following information: (a) statemont of objectives of the schema, (b) dGscription of the gcheme, (c) Infrastructure facilities, (d) technical feasibility, (e) economic viability, .(f) financial 222 requiroments,,(g) markot.ing and (h) jpor2ting agencies - organization and thuir management. Per formance of tha Scheme As at the end of December 1976 about 45,000 villages wore adopted by the commercial banks (Tabla 4.1) and the total loans outstan'ding was Rs.234 crores. This constituted 31 per cent. of the: total direct finance outstanding against agriculturs in March 1976. The outstanding credit in Andhra. Pradesh 'alon.e was Rs.8c crores which constituted 35 per cent of the tctal credit outstanding under the village. adoption scheme. Thuv the distri- bution of credit among states was sven more uneven· under this scheme than the general distribution of credit to agriculture. bst Eengel had the lergest number of villagos adopted. The number of accounts adoptid per village variod between 1 and 75. 'The nuniber of accounts per adopted village was luss than 20 in Gujarat, Haryana, Himachal. Pradesh and Uttar Pradesh. The outstanding credit per village varied from Rs.1,666 to Rs.1,84,519. The average amount outstand-ing per account in all the villages taken together wås Rs.1,995. The data presented above are very- revealing. The avarage number of loan accounts par -adopted villago works out to 25. 223. TASLE 4.1 : CREDIT OUTSTAN0tNG UNdER VILLAGE ADOPTION SCHEME (as an December 31, 1975) State/Union No. of No. of Amount No. of Amount outstandinc Territory villages direct outstan- accounts (in rupees) adopted agricul- ding per tural (Rupees village Per Per loan in lakhs) village account accounts serviced in these village 1 2 3 4 . 5, 5 7 1.. Andhra Pradesh 4,313 3,26,865 7,958.32 75 1,84,519 2,434 2. Assam 888 12,767 139.07 14 15,661 1,089 3. Sihar 2,129 50,024 727.04 23 34,149 1,453 4. Gujarat 1,503 16,711 786.54 11 52,331 4,706 5. Haryana 1,381 15,444 656.53 11 47,547 4,251 5. Himachal Pradesh 592 8,234 68.21 11 9,856 828 7. Zammu & Kashmir 79 1,193 19.90 15 25,189 1,668 8. Karnataka 2,94.9 76,890 1,920.98 25 65,140 2,498 9. Kerala 697 71,534 522.78 26 75,004 730 10.. Maharashtra 2,286 53,220 2,155.30 23 94,283 4,049 11. Manipur 93 1,794 21.14 19 22,731 1,178 12. Madhya Pradesh 2,434 19,481 595.24 8 24,455 3,055 13. Meghalaya 77 3,194 27..34 41 35,506 855 14. Nagaland . 16 195 1.56 12 9,750 846 15. Orissa 2,090 76,478 823.10 . 36 39,382 1,075 15. Punjab 1,543 25,172 801.36 16 51,935 3,183 17. Rajasthan 3,263 25,652 830.28 7 .25,445 3,2356 18. Tamil NadQ 2,100 97,533 1,388.51 46 66,119 1,423 19. Tripura 96a 14,916 78.57 15 8,127 527 20. Uttar Pradesh 7,021 1,32,228 2,113.42 is 30,101 1,598 21. West Bengal 8,508 1,38,048 1,646.33 16 19,125. 1,192 22. Arunachal Pradesh . 3 7 0.05 2 1,666 714 23. Chandigarh 3 5 0.12 1 4,000 2,400 24. Dadra and Nagar Haveli - - - 25. Delhi 95 1,342 36.75 14 38,694 2,739 26. Goa, Daman and Diu v7 1,330 138.15 13 39,329 2,868 27. Mizoram 1 30 0.30 30 30,000 1,000 28. Pondicherry .53 3,023 51.31 57 96,811 1,697 TOTAL 45,362 11,73,310 23,408.41 25 51,580 1,995 Source: Reserve Sank of India, Department of Banking Operations and Development, Bombay. *~ 224 In fact there aré meny states whore the numbor of accounts por villaga is less than 15.* With such limitad numbar cif accounts, It is hardly possiblé to ovalvo or implamant z.n 'integrative' approach to landing. As mentioned in a different context, if on is to exploit fully the forward and backward linkages in production and markoting, thare must be sufficient number of borrowers. As things stand, the village adopcion schema appears to be only a convenient device to avoid scattered loans given under conventional credit schemes. One o f the objectives of the village adoption schema was to be able to .go to the help of cultivators with small holdings. We have not boen able to obtain data on the distribution a-f borrowers according to tho siz o f land holdings in those villagas. Perhaps a comparison of this distributioi with the overall distribution could indicate whother the introduction of this scheme' has had any impact on the provision af credit to the weaker sections. As mentioned earTior, the average size of- the account is Rs.2,000... As at the end o f March 1976, the averaga size of the loan outstanding. in th, case of all diroct finance to agriculture was Rs.2,437. It is not clear whethar ~this slightly lowor figure for the account size in the case of adopted village means much in terms of thd distribution af credit. Fc . 225 - Qxample, in the case of Andhra Pr=dosh the amount outstanding per account in the adopted villago was Ra.2,434 whcrcas in the case of all direct finance to agriculture, the avarage.size of the account in that state was Ras.2,164. Thus, there does not appear to bo any marked difforance betweon the adopted villagos and non-adopted villagos. It would not be too strong to draw the inference that the adoption of a villago as such does not imply any marked change in the mannor of providing.crodit to agriculture.* *The State Bank of India has experimented with a slightly alterod scheme. They have set up Agricultural 0evelopment Branches which devote thomselves exclusively to thu credit needs of agriculturists. As against a total outstanding. credit to agriculture of Rs.301 croros by the State Sank of India as on June 1977, those branches accounted for Rs.125 crares i.e. 41 per cent of the total.. An analysis of the activities of those branches in comparison with all rural branches revealad the following. As of June 1977, while the amount outstanding par account for all branches was Rs.2,260, the per account outatanding in.Agricultural Development Branches (AD0) was As.2,085. Of the loans distributed during 1977 in AOBs, term loans constituted 48 per cent whereas in all other branches it was 35 per cent. The recovery ratio for short term loans and term loans in ADSs was 64.4 per cent and 58.2 per cent whereas in other branches the corresponding figures were 52.9 per cent and 51.6 per cent. In-the Agricultural Development Branches tho share of farmers with less than five acres in the total outstanding credit was 52 per cent in the case of short term credit and 33.8 per cent in term loans. Corresponding figures for all rural branches of State Bank of India are not available. But for the banking.system as a whole, the figures for 1977 are 53 per cent in the case of short term credit and 25 per cent in the case of term loans. Thus the distributiQn of credit is moro equitable and recovery performance batter in the case of AD8s than in other branches. This points to th6 difference that intensive programmes can contribute. 226 Perhaps one difficulty faced in avolving an integrative approach to lending is the.exi.stence of multiple agencies providing credit. The role of. commercial banks in areas where co-operatives are already doing well is being-examined by policy- makers. But at least as far as commercial banks are concerned it is agreed now that where -a particular village has been adopted by .a commercial bank, other banks would no t,_go i.n there unless the potential is well established for the need for another bank. In the earlier chapter we had referred to the low credit- deposit ratio in rural areas. The examination of the village adoption scheme clearly shows that the potntial for increasing credit is quite large. The average loan outstanding per village under the village adoption scheme was Rs.51,58O. But in the case of'Andhra Pradesh, the amount outstanding per village under the same scheme is Rs.1,84,000. Thus the scope for injecting larger credit exists. This is not to imply that credit should just be given without examining the economic viability. These data, however, establish the potential which can be exploited. The performance of tha villagp adoption schem.e so far indicates that the idea of nenie.development has. not yet taken root. Increasing the number'.of villages adopted'will not serve much purpose. Perhaps with a view to ensuring a more even 227 distribution of credit among st=tos, scmo mora villages in som- statas may have to bo adopted. However, the emphasis now should be on taking a closez look at 'tho villages already adopted. The ds, thrust should aim at c.vering as many of tho aligiblo borrowers as possiblo in onch villago nnd alsc promoting an integrated developm,nt af the village economy by providing credit for Cnutually supporting economic activities. CREDIT CAiMPS In extending increased credit to agriculture, ona af the in major difficulties faced by banks is/locat.ing viable borrowers particularly among the small and margincl farmors. in order to fulfil this purpose, it was also considered essontial by banks to coordinate their afforts with the local government.fficials in a plannod way. One strategy adopted by a nationclised bank in order to achieve this purpose was to organise what are called credit camps. Oblectives and Orzanisation of Camos The organisation of credit camps was an attempt to take the loan sanctioning machinery r-ight up to the village. At these camps organised in the remota villages, loans were sanctioned and disbursed to the villagers by the banks. HcwGver, the, 228 organisation of a cradit camp was procodcd by a numbr of actions. The starting point was the convening of a workshop by tha bank. In this workshop the branch managars of thc rural and smi-urban branchos, koy devolopmant afficars of tho government functioning at the district and the taluka (sub-district) 13vels in rural upliftment programmos participatod. Suforo participating in the workshop, tha taluk developmant officor in coiporation with the branch managers was to identify and survey at j.laast five poten- tial villagas located within a manageable distanco from tho branches and having substantial credit gaps. In tho workshop,, tho. varioùs agricultural devolopmental schemes designed by the bank wero explainad to the participants with a viei to devolaping an understanding o f the bank's policios, procedures and other roquiremvnts in financing agricultura and möh . of smalI m.dans in rural areas : The davelopment officors of the government also explainad to-the bank representativos the various types of pro.grammas which-were buing implemented by the state gover.nment, the extänt o f subsidy and other assistance they would. bo ablo to provide to the bank in financing rural pepz. Th credit plan prvpared for each identified village was further discussed and finalised- -a, joint session,,during the workshop period. Tho time .schedu.1e of organising thå village meeting 229 and the procedurs for identification of perspective borrowers were also finalised jointly in the workshop. In each selocted village, meetings of villagers were convened jointly by the branch manager, the taluk development off-cer, extension officar, village level workers (VLW), and agricultural officer of the bank, and the various rural credit schemes designed by the bank were explained to villagers with a view to creating an awareness amongst the rural people in regard to credit facilities avail- able from the bank for the different productive activities. Norms of eligibility and procedure for availing of finance from the bank were also explained to the villagers in each meeting. After the.village meeting, a team of officers identified eligible persons and prepared their loan cases in the prescribed loan application forms. The Talathi (village revenue official) provided land record information and other necessary certificates in regard to creation of charge on the land; and the village level worker (an official) also obtained necessary cartificates from village co-operative crudit societies and thus the loan cases of eligible persons were prepared within a fortnight. The loan cases thus prepared were to be screened by a screening the the committee consisting of/branch managers,/agricultural o fficer of' tea bank and state officers engaged in rural development, 230 Tho eligible applicants were interviewed in the village itself and loan applications found appropriate were recommended. In all the cases where the applications were rejected by the screening committee, the applicants wars informed of the reasons -for the rojection by.the branch. The loan applications recommended by the screening conmittee wate sanctioned by the branch manager and loahs were disbursed on a pro-datermined date by organising a credit camp. Usually it was expected that in each selected, village about 30-40 persons would be financed. To the credit camp, government officials functioning at district and taluka levels were invited. Villagers of the five- selected villagas including borrowers as well as other leading persons of the area were also invited with a view bc create an awarenpss among the rural people. regarding credit facilities ppavided by the bank. Thus it appears that the entire proccss starting from.the organisation of a workshop and rasultitg ultimctoly in the credit camp where credit was dis.tributed, was intended to involve jn the provision of credit all:poop,le who wero: interosted in rural development. Since the process of screening and lending was more or less opan, it also had a substantial demonstration effect. 231I Performance of the Scheme The nationalised bank which conceived of the idea of credit camps organisod as. many as 141 credit camps during 1977-78. These credit camps helped the bank to disburse Rs.3 -crares to 16,516 borrowers (Table 4.2). Of these borrowers 4,107 were from schedulad castes and scheduled tribes which represented the weakest section of the society. Some 246 branches participated in the initial workshop. However, only 141 branches eventually organised credit camps. The average amount sorctionad pcr account in all the credit camps taken togather worked out to Rs.1,786. The average size 'is,. thus, lower then the all-India average for all direct finance to agriculture. The distribution of credit in the various places also indicates that the average size of the accounts. did not exceed Rs.2,700. Those data seem to confirm that these camps havo been able to provide credit to a large number of genuine small borrowers. The bank itself regards this effort as very worthwhile because approximataly 16,000 accounts were reached without any additional cost to bank. 232 TAaLE 4.2 . NUMBER OF CREDIT CAMPS ORGANIZED AND AOVANCED PROVIDED IN 1977-78 BY ONE OF THE NATIONALISED COMMERCIAL BANKS Numbar of No. o" No. )'. Total cpadit Amount Credit sanctionad branches branches cradit camp4 sanctioned par to SC/ST persons Region which which . actually No. of Amount account No. of Amount partiaipated organized organized accounts- (in'000) accounts (in'000) in workshops cradit camps Head Otf'fica - 150 50 333.33 - Bombay City 2 2 2 252 457 1813i49 86 121 Bomfbay Suburban 7 7 7 831 882 1061.37 205 116 Poona 1 1 1 211 142 672.99 24 17 Nasik Ahmedabad 17 14 44 4076 5460 1339.55 1730 1359 Ohaunagar 4.1 10 13 867 2344 2703.58 293 193 Baroda 46 41 50 3982 9217 2314.66 127 227 Palanpur 49 36 60 - 2146 4552 2121.15 529 436 Rajkot 38 7 4 -102 145 1421.57 - Bhuj-Kutch 23 8 - 7 321 916 2053.58 73 63 Surat 48 27 27 23.15 4667 2015.98 815 1335 Bhopal 19 19 . 19 876 495 :'565.07 188 103 Bangalore 2 2 2 321 154 479.75 21 10 New Delhi 6 6 6 17E -137 778.40 16 7 Calcutta - - - -- . TOTAL 299 . 241 180 16576 29618 1786.80 4107 3987 SC/ST = Scheduled casta and schoduled tribe. 233 Imoact andc Sczce When ana looks at the process of organising credit camps as a tol for distributing credit to waker sections in rural areas, it has certainly added·a now dimension to the efforts of commercial banks to reach the poorost soction of the society. More recently sevcral state governments have baen expurimenting with a schema under which they select five poorest families in each village and provide them help to bring them above the peverty line. The selection of farmers in an opon forum has had tha offact of eliminating personal prejudicos and biases. From all reports, this has gene well with people in general. Therefare the credit campa in as much as they go through the process in a fairly open manner may produce a favourable offact on the people who may now look upon .a bank as a helpful institution. Hawever, we do not have any evidence to show whether the borrowers selected in this manner have a better record in terms of repayment than other borrowers. This, in fact, is a crucial test and ene has to wait for some more years to see if this is true. However, it is very clear that the success o f 'this scheme depends. largely on the staps te be taken bGfore the organisation of a credit camp. The setting up of the workshop, the active involvement af the state development officers and evolving suitable programmes and schemes all cf 234 these are essential if the credit camp which is the end of the process is to succeed. I-T fact,, in the very bank which introducea the credit camp not all branchei that participated in workshops organised credit camps, While the openness of the credit camp has much to command, its ultimate success depends, just as in the case of village adoption scheme, in evolving appropriate prograimes'and viable projects within these prdgrammes. Without may not' the latter, the strategy of credit camps take the banks very far. GROUP GUARANTEE SYSTEM Commorcial banks provide both short term credit, popularly known as crop loans, and term loans' to finance capital expenditures such as improvement of land, digging-of wells, purchase of tractors. and pumpsets etc. In providing both short term, and lqng term credit to simall farmers, banks have faced tUc kinds of difficulties. One was the problems faced in obtaining prpor security from such, farmers and the second was the inability of such formers to afford certain capital assets Iike pumpsets and tractors which are lumpy in character. It is to overcome these di.fficulties that banks have introduced the group guarantee schemes under which the loans granted to a group of people are- guarantezed by all members. Thus. the main objectives of the group guarantee scheme are : 235 1. Enabling a largg numbor of farmors, particularly small farmors, to obtain loans more oxpeditiously and at lasser cxpenses than would have been possible for them if mortgages wäre insistad upon. 2.. Inculcating a sanse of colLective responsibility among mombers af homogonous group af farmers in the matter af utilisation and implanentation of loans. 3. Enabling a.homogonous group of small farmors to acquire capital asots which can bo used commonly. Tho tar.m 'homogenous' groups of farmors has bacn used by different banks in difforent ways. It ranges from farmers with identical oconomic status or with identical cropping patterns to just a group of farmars financed for the same activity. The minimum number in a group is generally fivo but several banks have given discretion to ficld staff for reducing tho number to three if a larger group is operationally inconvenient. The loan documents under group guarantee approach are oxecuted by all members, ane member in the capacity of principal debtor and the rest as sureties.. Generally it is made as c pre-condition that furthar renewal or additional icans to mcmbers will bo r granted'only when the total repayment af lcans by all the members of the group has been complated. In genuina cases, some bånks have made a departure in this regard in as much as the defaulters are individually dealt with and other members, who havo repaid. their loans are granted frosh credit facilities by moving them into other groups. 236 O-eratoha. Excerience. The group guaranteo scheme has boon in oporation, in one orm or the othe:, since 1971. In the case of the State Bank of india, agricultural loans on group guaranteoc basis have been granted in the following instancos. 1. In those• states who.ro special legislations for facilitation of borrowings from commercial banks (vide Talwar Cammittee recåmmendations) have not beon enacted.- 2. For crop loans ranging between Rs.3,000- and Rs.7,500. 3. Lcans to landless ;laborers. 4. Loans 'for alriod agrirultural activitics - up to'Rs.5,000. 5. Loans for purchase of pumpsets and othor equipment including animal"<rawn carts. up to Rs.5,000. 6. Loans for larid developmant/reclamation/ imiprovement/soil conservation up to Rs.1,000. 7. Lwans for sinking shallow walls up.to Rs.1,000. 8. Loans for- purchase of bullocks up to Rs.1,000. 9. Loans for purchase of tractors up to Rs.50,000. The State Bank of India reports that the system is working, by and largo, satis factorily. 237 One thing is obvious from the listing of the activities financed by the State Sank of India. The scheme has been introduced marelyto takc care o f the problem faced by the bank in obtaining necessary.security rather than for the purpose of providing credit to finance lumpy assets. There are, howover, some successful experiences in providing credit for joint:ownership of lumpy assets and for group action in getting input supply and marketing output. We studied ono such experience. For example, one of the nation- alised commercial banks (Oena Sank) helped the members of Motera co-operative society in Gandhinagar district in Gujarat to meet the cost of a proposed tubewell. Motera village is.15 km away from the bankts Candhinagar branch. It has a population of 2,500 and 200 land owners. The total area is 993 acres. The Motera irrigation co-operative society approached Oena gank for a term loan for drilling a tubowell at villago Motera. The Cost of the proposod tubewoll was estimated at Ra.1,50,000 out of which 50 por-cent-was subsidy from Small Farmers and Agricultural Oovelopment Agency, Gandhinagar as tho society was formed by small and marginal farmers. The society was sanctioned a term loan of Rs.72,000 to 24 members. The tubewell was expected to provide water to 64 acres of members and 59 acres of non-members. 238 The calculations made by tha banks showed that there would be enough surplus after the payment of th·o cost af electricity for thG society to betr tho administratiVe expenses and to ropay the loan. Similarly, there have been schemes prepared' for providing financial assistance to fisharmelå and others for daveloping fish farming commonly. in fish ponds. However, it is trur to say that the experiments. of the typo that we have indicated are few. and far botween. dy and large the group guarantse schemes have besn confined,as stated'-arlior, to fulfil the objactives.of overcoming the difficulty faced in obtaining propar security for small farmers. Our, own intarast in trying to study the· group guaranteo schome originatad bocause of the special rola such a schema will have in providing lumpy assets-to small farmors. We havG-already pointad oUt that therg is a more unequal distribution of term loans according to the size af holdings. The importancG of commGrcial banks in providing. term loans is now rocognised by everyone. Even oxperts who are o f the opinion that the cominrcial banks should not anter inta aras wher. co-jperhtives are strong seem to concede the rola of-commarcial banks with respect to tarm loans.* *The Oantwala Committeo observed ; "It appoars to us in the years to come, the commercial banks and the rogional rural banks, if they take root will.hava an edge ove*r the primary agricultural credit societies in the supply of medium term loans and this is an area which the commercial banks and the regional rural banks should exploit." Rescrve Bank of India, Reoort of the Review Committee on Rural Banks, pi. 239 At present in the tarm loans for agricultural activities provided by banks, two. purposes dominato. Thoso aro minor irrigation and farm mchanisation. Together th.oy account for 75 por cent of tho term loan accounts and 80 por cent of outsltcnding term loan amount. If a significant proportion of the term loans is to go for those purposes then in tho absonce c:f suitable group schemes, small farmers will be complotaly loft out af the purview af the commarcial banks, It is there fore imporativo that if the term Icans provided by commercial banks are to go to the help af the small fårmers as wull, then scme. kird of group londing will hava to bo dona. The C:mmitteo appointed by tha Reservo Bank of India to roview the agricultural credit schemos of commercial banks had the following comment to make on credit to minor irrigation:, 'SO far credit schemes for minor irrigation have ban formulated for ;individual oiership af these facilities.' Thc instances af "Group Guarantee" approach through which benef'ts of these. schemes have been made availabla to small and marginal farmers in the form of joint ownorship of irrigation facilitios are rara and are an outcome of the initiative takon by some branch stoff at the. implementation stage... This practice cannot be- developed on a large scala at the implementation stage alone. Cznscious and systematic.efforts-should be rede to- formulata location-specific . . . .. . . . ........ 240 minor irrigation s6hemes 'for joint ownership by groups of cultivators. Without such deliberate and concerted efforts, many small and marginal farmers with fragmented holdings are unlikely to get minor irri.gation faci-lities."* Thus, at the moment, there is not enough. experience in relation to commercial bank credit under the groip guarantae scheme for acquiring lumpy capital assets. Quite clearly soverol problems can arise in the use of such assets among the members after acquisition. Serious quarrels among members may seriously jeopardise the project itself. The commercial banks have, therefore, to keep, a continuous watch an the use of such lumpy assets. However,. it goes without saying that in the absence of such group schemes, the role of commercial banks in provid- ing term loans to small farmers will become negligible. *Reserve Bank of India, Report of the Ex-ert Grouo on Agri- cultural Credit Schemes of Cmmercial Banks,. 1978, pp.27-28. 241 SUMMARY Ono of tho approaches adopted to increase landing to the pri.or.ty sectors came to be known as aro approach. This implies choosing a compact area, ideitifying, the credit gaps and develop- ing it intensively through integrated banking facilities. One of the tasks undertaken by the iead banks was to formulate district credit plans. The purposc of drawing district credit plans was- to analyse the economic conditions in a particular district, to pinpoint the credit gaps that could be filled by banks and to evolve specific schemes which can be implemented by banks in that district. The district credit plan is thus to serve as a basis for integrated action on the part.,f the banks operating in a district. By now, approximately 200 district credit plans have been prepared. However, an analysis of these plans indicates several weaknesses. Most of them contain an exhaustive inventory of natural rosources. But they do not carry indepth studies at village lovel or at block level. The total estimated credit requirements in a district are arrived at through very simplistic methods. Mhile the projects that can be undertaken, in s 'itrict are indicated, the pro forma income statements relating to projects ar_ too. general to be of direct use. One major purpose of drawing credit plans" is to prepare a 242 sat of projects -whidh Will exploit the linkage effects fully. The district credit plans as they are being currently formulated , do not provide a firm basid for banks to allocate credit. Another application of the area approach was the introduction of the village adoption scheme. The basic idea behind this scheme is to "saturate" individual villages rather than spreading the efforts thin. This scheme is also expected to lead to an integ- rative approach in lending.' It is also hoped that .by adapting a wholc villago, the weaker sections of the community will be helped better. At prc-.ent 45,000 villages have boon adopted by the commercial banks. The total loans outstanding under this scheme constitute one-third of tho total direct finance outstanding against agri- culture. However, thore is an uneven distribution of the total- credit outstanding under this schemo among states, With very small numbor of accounts covered *in each villagc., this sch(4me can hardly ovalve or implemont an integrative approach to lending.' Even thoigh the average size of an account is. smallez than in all branches taken together, there does not appear to be any strong evidence to indicate that the adoption of a village as 243 such has had a mark.d changc in the mannar o f providing crdit to agriculture. The extremo variations in the cverage loan out- standing per villagG indicata the high potential that is available for poviding credit to agriculturs. The porformance of tho village adoption schome indicatas that the idea of intensive development has not yet taken rot. One of the difficultias facad in extanding credit in rural arcas is in locating viable borrowcrs particularly cmong low incomc groups. One of tha nationalised banks adopted the strtogy of holding credit camps in villages in order to overoome this difficulty. At these camps organised in the romote villages, Ioans were sanetionod and disbursed to the villagors by thc bcnks. Howevor, the organisation of a credit camp was proceded by the setting up of a workshop in which not only bank officials but also stata government officarz connected with rural dovelopmont participatcd. As a result of the discussions in thc workshops, the criteria for granting credit and the purpose for which the credit were to be grantad were determined. Thus the entirc process, starting from the orgarisation of a workshop and resulting ultimatcly in the crGdit camp whare credit was distributed, was intandad to involve in the provision of credit all people who ware interostcd in rural dovelopment. The greatest merit of this scheme was its oponness. Howev,er, it is very clear that the success of a scheme like this depends largely on the steps taken before the organisation of a crcdit camp., As in the case of village adoption schamo,.. its success depends an evolving appropriate programmes and -viable prjccta within those programmes. Commorcial banks have faced two kinds of difficulties in providing credit to small borrowers. One, those borrowers did not have proper security to offer and two, it was not viable for them to own cortain capital assnts which were. lumpy in character. To overcome both these difficulties banks have introduced group schemes under which loans are grantod to a group of people and the loans are guaranteed by all members. Our analysis of the group guarantee scheme in operation so far indicates that most of those schemes have mainly been directed towards overcoming the first difficulty of getting suitable security. There have been only a few examples of providing credit to groups of people for joint ownership of lumpy assets. It is well-known that. there is very unequal distribution of term loans by banks according to the size of holdings. This is because that small borrowers are unable to own individually 245 certain typas of capital assets. If a significent proportion o f the term Icoans is to go for such purposes as acquiring pumpsets, agricultural implgments and minor irrigati-n facilitics, in the absence of suitable group schemes, small farmers will practically bo denied of term loan facilities from commrcial banks. Ü9 b.h 246 AppfNPIX 11 OUERUIEIM OF i1E ANALYSIS CONDLTkD. IN'SIX SELKCTED CREfIT pf.ANS Analy-. Crodit Plan Bijapur .Diatrict Anantnag District Uadodara D4rict falura Dstrict Pudukqttal Di3tr'ict Uaranaal tical and the Syndicato Bank `State Bank-of India fank:~of-arada Syndlcate Bank Indian overaeaa Gånk District Centent Laad Bank Union Bank 4f India .1 2 3 4 5 6 1. Natural Rescurco Analytla la based on Indepth studlas of Ditt rict profil@ It la the same as Four indepth atudiea Indepth ttudies Inventory aecondery data on the oconomic, Bell hased on ancondary the plan prepared wpa~ canductud at of all the 22 land utilleation, climatic and agrl- data and the Lead by Syndlcate Bank block leväl to. blocka L-Ore cropping pattern, cultural conditiona Bank Report la for.Bljapur analyne-aocia- conductad to IrrigatILon, rain- of threa repreaan- givon,. The District. aconomic conditione. acnulra.Lhe fall and. climato, tattue Blocka wore diatumipn la of Small turvaya of bacellpa data eoll typa utc. conductud. A falrly a very general the remaining an-phyalogra- A very general good resourcas nature gnd covera blocka ware ale phic and aconomic profle InVentory was li and agro- done. Analyats Inatural of the dietript propared. with climatic conditiono, of phyelographic recource and a-hrlaf review separate induatrial set up conditione, oa1tion. of the development conaideration to . and tnfrastiruture infratructure,. Thia la f-variouaeactora an Induatrial racilitiea. development perhapa the are: fiven. . block. potontial etc. hnost jptia- was doneon the factory baeia of theea apprach of atudlai. all the six . plana. 2. 1nventory of A very brlef Ni Thare la n~sje Th@re la b Nil Soa Infor- manpowär~wIth mention. Qf the except a brief . cial.tlcatlon mation -dffelrent skilla claaelfication nr' mentlon of the of workera- -. though workerm, In oducation and - Induatrywlan collected diffarent cato- tralning but not akill- - has not been garlan en the faclittie. wle. There analyeed basta of the la no Indepth- fully. 1971 census atudy or la made. aurvey. 247 . 2 3 5 6 3, AnAlya of th 41ak a noAmlysl# The Indepth studlaq A talrly gaod 'analyula Suma a in The dau131oF<ant Daalpmental nada dagraa of duua- ar ifa la done. in throa baaSke haua a the proaent atato filjapur plan, achoiaa undor- war Identitled løpmant o varlaus In t '!u fconomla buon upad to analyao at doualopment in taken by ather at the vil1a0O an.tora to dato profil ot tha tha ganaral atata varloun netara la agenclo!5 wara laual thraugh and ldantlflcatlen uslatrict, thpro of davløpmant of proutdod. A groat canaldared. Indepth atudia of kny untara. la a uary þrlot uarloua faectore, dual of uomphaaltu Chi10ce 0<f and canaultø- dlacuaalan af Ky Bactora have la on Induatriaa bankable tiona witi the rolo of fach bon ldpntified. au la ubutiua. - nut projaeta ina panchayata - aactor -in the køy oectora haua madu on the Grawth contra dauelopnnt'or th• not beun ldqntlflod. baula of tlr- Ygoro Idontlflad. di at rlct bt4t Eoa Induatrla . depth atudies . Farnmora wara notiing la anid haua boen auggasted and lnforial cnaultad about the na haulng dovaløp- diacuiona. froquntly Patora which haue mont potential but N attoppta for taclncal a high growth wlthout a ffitrang wara 14åd4 to Information potentlal. baula. Idantlfy ky and agricultur.al anntara. practca to propara bankabl ajchamnaa. 4. Eatinaton tof Fr avary auþapator, torg detaipd and No aystfmlatlo qttampt The crodit Eatimatlon of Tio mothod of Cradtt fRaquIre- the approxlmQtu lagical autimattan la made to aatiinate ruquirementa mactoral eradit oatiniation wa tha manLa by varlous oradit naud par unit at eredit noada Viz, and pFojoct damand pof unit hauve requirmenta la tano but the anctora la oatimated (noth- for erop loan for eradit. Tha baun worked tlo Bagmo am In uatiimata are Ing t anald abaut requiremente, coat attempt la to astimate out more other plane. Ilkoly to be bottor hoi thia la dona) of cultivatinn. how mnuchthe farmeora ayatomatically Tha astimnatlan beauao at the and thio la fortillalr Inpute Qr Induatriallota by ponaldring ulQthoda are auprlor bauellna rpuitlpliod by the atc. have baun aj[Luld damand rather uarloua cot ad hoc and data on coat of numbar of unit atidled in uarlaua than 1w1ll' demand. compononta. Inadoquate. cultluatlan, to ba cunred parta and have boen Impact of undar -tho plan. iand to øatimatQ f6rtillar and The method la cradit noada. Irrlgatlan etc. hløhly aimplifled. 240 2 3 4 5 6 5. An Analyals and Analyes of other This t.ea the Infor- A brier discusalon The Implicit Organtzational No special affort recognttion constrainte to wation .,n infra-- of infrastructuro assumption in rsourco cona- was neded for of infrast4pjctural douelopm'ent la structu-o and In prosentad. No the plan la traint la at this becausa the and other entiraly absent. the dou&dopmont plana mention or recog- that crodit is least consider- indepth studis conatrainte on Implicit in:tho propared by government nition or analysis the only eZ The of all the blocka dovolopmunt and analysis ithe agfncios at the of other constraints. constraint. imnediata infra- gonerated a great viability of - agsumption that diatricE lovel Whilo Thuro Ii a discuasion Thure is ng structure doal af innight bankabl projecta eradit is the , solécting tho bankabl of the dovolopment discussion of requirementa for and information was made. only bottilenock. achemo. .. .. plana of pthar the oxiating the implomonta- on this. Dvselop- agencis 11<þ infraet ructura tion'of plana mont schosea lika :SFDA ITADP. etc. or prospeczt qf are indicatd. SFDA atc, are its dovolopment. discuased. 6. Financial . riof, highly Proforma Incom Thare is no sound Same as in Proforma Incoma Proforma imcome fqgaebillty .ggner43lis0d Statomnts similar basla for the choico Bijapur plan. statemante are satooments are analysis of proforma incomo to the Bijapur plan of bankable proeoptad for a analyaod. Th9y important •. tatomenta for hav been prqaontad. projets. praforma numbor of bank- are mora detalled bankabla - foveral projecta But the choico of incomo statemänta ablo projocts. and are likoly projects and are prosentad. projucts la moru. for a fow projecta Those statomente to bo mors ..thel sonalvity No aqalyes of moaningful and is and demand for are more roallatic analysid wero. the doneitivity based on indopth industrial detailed and bocause:tho ck.ndictod. of profit to studios. ta -producta are ixplicit data is changes In sonsitivity analysia considerad for assmptiona reprostntativa product prico of bankabla projqcts the feasibility hava bson.made and mars or coat is-dans. analysis, but nn sa that the accurato. componento is projectiona are statemonte don. mads. are bttar guides to financial feasibility of projecta. 249 APPENDIX 2* SPECIAL FEATURES Of Til SIX SEI.CTEC CREDIT PLANS fijerur District Anafintag District Vadodara District. flathura Dietrict PLdjkottai District Uaranmäl Districk syndicata flank State Bank or India f|ank of faroda syndicato Bank indian Duearead Bank union Ban of India 1 2 3 4 5 6 j Dopolta potontial 'has Indepth studias oft throo bp68cial emphaala .ia given Sams ao in (1) Infrastructural contrainta Indepth atudlea boon projectod by using blecke were carried out to industrial deulopment are pointed out and the of all the 22 exponential trend. An 'tö acquiro firat hand . and the development of noad for iminodiate blocka wor attompt has hoon made knowladga of natural,. small and ancillary additiond to infra- performd and to compara the projgc- raaources, infrastructura, units. . Otructuro has han data on tion of doaand fok physiographic conditiona, discuaad in dtal. natural rouourcoa and flupply of cradit, current stata of deuglop- mnd infra-, mont etc. utructura post- tion, phyaå-n graphic conditiona etc. zwer collectod. 2. An attempt has been Central villagaf ware Various other operatiua keval-lea phaaing of Identif4cation made to allocato the idontiflad for the asta- devalopment ochemosa liko aoctoral cradit of contral and the burdan of financing b.lisapent qf uaful SFDA, ITAOP ote. have requiremente Ia dopendänt nctivitio couared ,sruico centros through been discusad. analysed.. Villagfa la under thp crodit plan Indepth 4tudia. made by tho to uarioua financial application of institutions, i.a. central place colmnrclal hanka, theory. coop. bankp, douelop- mont, an(1 financlal institution utc. 250 2 34 5 6 This explicitly recog- Project profiles for This Is the only Data for the feaslbility nizen the importance of some important plan where all the studies were collfcted at other constrrinto on industries with blocks wore studied the uIilage Ipual and the development i.e. organi- apparently great separately, i.e. projects were discussed zational and infra- development indepth studios of with farmers, panchayata structural constraints potential have four blocks and and other partioes. and whether the borrowers boen analysed. small suruys of can in fact make the rest. Most efficient uso of credit. of the analyses wore based on those studies. The likely impact The villages identified as of the credit plan central were further an the economy of studied for their growth the district has potential, for boon briefly possibilities of setting analysed. up bank branches etc. An attempt has been made to allocate tho burden of financing thy bankable schemes among various financial institutions. Chapter 5 SUMMING UP It is difficult to give a precise definition of the term "Innovations in Banking.". A it has been pointed out by Tobin and others, financial intermediaries like banks attempt to satisfy simultaneously the portfolio preferences of'borrowers who wish to expand their holding of real assets beyond their own net worth and lenders who prefer to hold a part of their, net worth .in assets which are liquid a6d which, have negligible default risk. In this process,. the financial .intermediari.es raise the lendable resources within the society.and at the. same time accommodate borrowers at lower ratea of. interest and. rt..easier terms than if they have to borrow dirctl the rs... These are the advantages specifically associated uith the widening of the operations "of financi,4. inter mediaries. Therefore X0all those Lcts specifically undertaken by financial intermediaries like banks which -b.ad to the per.formance of these two tasks better would be deemed to be innovations. Obviously there are costs and risks associated. with the raising of resources and lendLng, by the financial institutions. These inter- mediaries mist therefore be judged by how .well they are able to perform these tasks, taking into due accoun. the risky ahd costs involved. -2s2 Sanking growth in India un-il recently had ben true to the dictum where "enterprise leads, finance follows." The geographical coverage and concentration of banking in the country was largely a reflection of the pattern of industrial development. It is against this background that the nationalisation of the fourteen commercial banks in 1969 constituted an important landmark in the development of banking. It marked the beginning of a new orientation. Sanking was to play the new role of a catalytic agent of development. Keeping in mind this overall objective, the banking system was expected to -accomplish three..tasks. They were: (1) a wider geographical coverage with an emphasis on the spread of banking into rural areas, (2) a. larger mobilisation of deposits and (3) a reallocation of bank credit in favour of people with limited means and of sectors which had hitherto beei neglected such as agriculture. In looking at the banking development in India since 1969, three related questions arise. These are: 1. Is there a marked difference in the pace and - pattern of banking development since 1969? 2. Could the changes noticed since 1969 have been accomplished by the institutional system that prevailed prior to 1969? 3. How far has the banking system achieved the objectives o f nationalisation? 253 Even a cursory glance of the da,a relating to banking should convince anyone that the developments since 1969 constitute a marked departure from what had been witnessed earlier. For example, in relation to branch expansion which is one dimension of banking growth, it can be seen that between 1951 and 1960 the number of bank branches. ircreased by 1400., In 1970-71 alone the number of branches increased by 1882. Thus what took 10 years earlier was accomplished in one year. In .elation to the rate of growth o f deposits also there is a significant difference between the two periods.* Wlith respect to credit disbursal we have drawn attention already to the shift in terms of lending to the priority sectors. The only segment of the priority sector which had received attention even prior to 1969 was small scale industries. During the earlier period, for a variety o f reasons,- agriculture was not-even considered as a sector appropriate for bank lending. Thus in terms of all dimensions of banking development, there can be no. doubt that the trends noticed since 1969 are strikingly different.. *1e subjected the data available to a rigorous statistic-1 anal-i7s3 For the two pariods 1951-52 to 1968-69 and 1969-70 to 1977-79, we ectiita the fcIlwing equations: 2 Period I 1951-2" to 1968-69- Total Deposits .0841+.0042t R = 0.85 (9.41) *, Period II 1969-70 toa 19777 Tota eosits= -.1156+.0150t R = 0.82 (5.19) 2 Period. 1951-62 to 1977-78. Total-0eposits = 0.669+.0065t R = 0.85 (12.10) Oplying- the Chow test, it is, seen that, the slope coefficients for the two periods are significantly different. 254 The second question that scises is whether nctionalisation was as such instrumental in bringing about this change. Given the nature of the interests which controlled the banking system in India prior to 1959, it is perhaps inconceivable that the changes noticed since 1969 coub have been accomplished by the institutional system that prevailed earlier. It must, however, be noted some of the changes had begn to make their appeerance even in 1968-69 when the banking system was not nationalised but was under 'social control'. It is a moot question to answer whether the continuance o f social control alone coub have accomplished the tasks performed by the banking system since 1969-. It is also sometimes argued that in the period after 1959, the performance of the banks in-the. private sector was as good, if'.nct better, than the nationalised commercial banks in terms of deposit obilisation o.z branch expansion or credit deployment. This may utell be true but this, however, only shows the demonstratocr effect of the public. sector banks. The private sector banks constituted hardly 10 per cent of the total banking systan. either in tarms of deposits or credit,. The third question relates to the perftrmance of the banking system in relation to its obje.ctives. M.uch of this; study has been devoted to an examination of a number of issues that arise in this context. We have pointed out the areas o f weaknesses and strengths in the banking development. We have drawn attention to tIe fact that 255 in spite of a special effort to diversify branch expansion, disparities aMong states and among regions in terms of banking spread continued to -exist. After. the initial surge, there has also been a slow-down in terms of branch expansioni. The increase in the ratio of rural branches has also been accompanied by a fall in the ratio of semi- urban branches. to total branches. The heavy concentration of deposits in five:leading cities of the country continues. In terms of credit deployment, we have noted how disparities among states in terms of credit availability still exist and how small and medium borrowers continue to be at a disadvantage. However, with all the shortcomings noted, the new thrust in banking is unmistakable. The massive expansion of branches has undoubtedly raised many issues. The extension of banks to small places with a cost structure which is the sane as in the other parts of the country has raised the question whether an alternative institutional structure for spreading banking into rural areas is necessary.. However, any attempt to establish institutions which concentrate on only one aspect of bank.L,, such as deposit mobilisation or lending is not likely to be fruitful. Indian cooperative institutions in the ruralTeas have virtually been reduced to.the status of lending agencies with very little effort made to mobilize deposits. 256 The attempts to push the b.inking sys.tem inta newer seotcrs and areas ill obvIously requir` const an t·monitoring. The dançår of landing to uneconomic projects cannat be overlooked in the enthusiasm to p=vide credit to theåe sectors.., Howeer, the Indian experimant since 1969 does hold auf. the promise that it is possible to introdu:e fundamental changEs in the way in which tha banking system operates, if sericus afforts ar're ñede in this dir.ction. *. DOMESTIC FINANCE STUDIES # 45. A Statistical Analysis of the Dynamics of Economic Growth in Iran: 1959-73. December 1977. W.A. Dellalfar & J. Khalilzadeh-Shirazi. # 46. Innovations in Banking: The Syndicate's Experience. January 1978. N.K. Thingalava. # 47. Interest Rate, Transaction Costs and Financial Innovations. January 1978. V.V. Bhatt. # 48. Decision Making in the Public Sector: A Case Study of Swaraj Tractor. February 1978. V.V. Bhatt. # 49, Portfolio Determinants of Commercial Bank Earnings in Selected Asian Countries. March 1978. Katrine Anderson Saito and Dan P. Villanueva. #.50. Some Theory of the Financial Intermediation in Less Developed Countries. May 1978. Alan R. Roe. # 51. Innovations in Banking: The Gujarat Experiments. August 1978. V.G. Patel. # 52. Development of the Japanese Bond Market. September 1978, Kazuko K. Artus. # 53. Transaction Costs of Credit to the Small-Scale Sector in the Philippines, December 1978. K. Anderson Saito and D.P. Villanueva. # 54. Financial Institutions and Technology Policy. January 1979. V.V. Bhatt. # 55. Development Problem, Strategy and Technology Choice: Sarvodaya and Socialist Approaches in India. January 1979. V.V. Bhatt. # 56 Development Banks in the Financial System. June 1979. V.V. Bhatt. # 57 The Violated Neutrality Assumption and Counterfactual Income or Where Do We Put the Transfers? June 1979. J. Meerman. # 58 Estimating Counterfactual Incomes in Studies of Budget Incidence, July 1979. 3. Meerman and P. Shome. # 59 Household Income or Household Income Per Capita: Is the Difference Important? October 1979. Gautam Datta and Jacob Meerman. # 60 An Analysis in Development Perspective of Bolivia's Largest Public Enterprises: COMIBOL, YPFB and ENAF, April 1980. J. Meerman. # 61 Creating Capital Through Social Security Institutions: The Asian Experience (Singapore, the Philippines, Malaysia, India and Sri Lanka), April 1980. P. Shome and K.A. Saito. # 62 Informal Credit Markets in India, May 1980. T.A. Timberg and C.V. Aivar. # 63 Innovations in Banking: The Indian Experience - Impact on Deposits and Credit, June 1980. C. Rangarajan.