Banks eye rural loan growth to push credit-deposit ratio

Credit-deposit ratio indicates how much of a bank’s deposit base is being utilised for extending loans.

The development will help expedite the revival of the rural economy, which is struggling to reach pre-covid levels, with micro, small and medium enterprises, a major employment generator for rural India, still struggling to return to normalcy.

The move is also expected to help the Bharatiya Janata Party led government in a year of nine state elections, considering that rural distress and unemployment could have a potential impact on the results of the assembly polls.

Initiatives planned by banks include collaborating with non-bank lenders, including housing finance companies, to provide a major credit push for small businesses through MSME clusters, as well as direct disbursements to enterprises that are part of the sector.

According to the plan, state-owned banks have a target to increase credit in areas where the credit-deposit (CD) ratio is below 60%.

India’s CD ratio, based on where loans were sanctioned, stood at 72.1 in FY22, showed RBI data, with the western region having the highest ratio at 85.9, followed by the South at 84.1, and North India at 74.5.

The central region (50.5), north-eastern region (44.8) and eastern region (42.4) have fallen below the national average.

Banks have identified areas with the intent to boost consumption, bankers said. “A concerted push by public sector banks to identify areas is expected to give a fillip to consumption, especially on the retail side. PSU banks are also deepening their focus on individual loans and this push would carry that idea forward," said a senior banker at a state-run bank, seeking anonymity.

In view of the muted rural demand in India post-covid, the government has announced measures in the budget to support small businesses.

The Centre will allocate more funds to offer credit to MSMEs and bring in changes to the rules to ensure such enterprises receive their payments from clients on time.

The banker quoted above said while credit-deposit ratios are generally low in the East, it is true for specific pockets in other parts of the country as well. For instance,as per RBI data, Goa has a low CD ratio despite being a prosperous state.

“In regions where CD ratios are low, it is because of tepid credit demand. What also happens is that credit that is utilized in building infrastructure in some of these areas does not originate from that region, but from areas where the headquarters of the borrower or lender is located," he added.

On 30 August 2021, Mint reported that while there is an effort from the government to push credit in India’s eastern states, lack of lending opportunities and an unhealthy credit culture need to change before a headway can be made.

This, and a few other points, were raised at a 25 August 2021 meeting between finance minister Nirmala Sitharaman and the heads of all public sector banks.

shayan.g@livemint.com