Financial inclusion, as far as banks are concerned, seems to be limited to some parts of the country. At least, that’s what the numbers for bank loans imply.
It’s well known that some parts of the country are under-banked—the North-East is obviously one such region. On the other hand, the south of the country is known to have a very strong bank branch network. But it’s often contended that the reason credit growth is not stronger in places such as Bihar or the North-East is because these are poor places and the scope for lending is limited.
But what if we take the gross domestic products of the states and compare that with the amount of bank credit in that state? Everything else being equal, the ratio of bank credit to state gross domestic product (SGDP) should be more or less the same. That would mean that banks are lending their funds in proportion to the size of the state’s economy.
I have taken the figures for state gross domestic products at current prices for 2008-09 from the data put out by the Central Statistical Organisation—data which it says has sourced from the economics and statistics departments of the states.
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The data for bank credit as on 31 March 2009 for the various states has been taken from the Reserve Bank of India (RBI). Some states have not yet submitted their SGDP estimates for 2008-09, so for these I have taken their SGDP figures for 2007-08 and the credit outstanding as on 31 March 2008. Nagaland is the only state that hasn’t submitted its GDP data for both 2008-09 and 2007-08, so I’ve taken GDP data for the state for 2006-07 and the credit outstanding in the state as on 31 March 2007.
Unfortunately, the credit/SGDP ratio of the states shows wide variation. At the extreme low end we have the north-eastern states, with credit/SGDP below 20%. For Bihar too, this percentage is a very low 17.9%. But Manipur’s credit/SGDP is lower, at 14.4%. For Tripura, it is 15%. The chart shows that Nagaland is at the bottom of the list with credit/SGDP of a minuscule 10.9%, but the data is for end-March 2007—with that low a figure, the state’s reluctance to share its GDP numbers is entirely understandable.
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At the other end, at the very top of the table, we have Maharashtra, with credit/SGDP at 133.3% (for 2007-08), Tamil Nadu at 79.3% and Karnataka at 72.3%. Andhra Pradesh’s record is also not bad, with a credit/SGDP of 57.2%.
It’s very clear that states such as Bihar, Jharkhand, Uttar Pradesh, Chhattisgarh, Uttarakhand, Himachal Pradesh and the North-East are getting far less bank credit than warranted by the size of their economies. It’s also quite plausible that there’s a link between this lack of access to credit and the high level of insurgent activity in many of these states.
Another charge levied by some of these states is that their credit-deposit ratios are very low, implying that their funds are being sucked out and used in other parts of the country. Bihar chief minister Nitish Kumar has urged banks to improve the credit-deposit ratio in the state, which, as at end-September 2009, stood at an abysmal 27.6% for all scheduled commercial banks, according to RBI data. Other states with very low credit-deposit ratios are Arunachal Pradesh (26.6%), Meghalaya (25.8%), Tripura (29.3%), Jharkhand (32.9%), Uttarakhand (30%), with Goa (24.8%), being a surprise on this list.
At the other end we have the southern states—Tamil Nadu’s credit-deposit ratio at end-September 2009 was 110.9%, Andhra Pradesh’s 101.3%, Karnataka’s 60.9%, while Maharashtra at 85.3% and Gujarat at 60.8% also had high percentages. Some of the northern states, such as Rajasthan (80%), Punjab (66%) and Haryana (62.4%), also had high credit-deposit ratios.
In short, the eastern, north-eastern and central parts of the country have been neglected by the banks. There are many reasons for this—difficult terrain, insurgencies, lack of good governance, lack of borrowers to supply collateral and the inability of many people to generate a surplus to repay loans. After all, there is no reason why banks will not lend to potentially profitable activities. But if RBI is sincere in implementing its much-hyped programme of financial inclusion, it must focus on these states.
Graphics by Ahmed Raza Khan/Mint
Manas Chakravarty takes a weekly look at trends and issues in the financial markets. Your comments are welcome at email@example.com