The new initiatives taken by the State government to give a fillip to industry, Information Technology, higher education and tourism are expected to expand bank credit and strengthen further the State's sound banking infrastructure.
KERALA has a sound banking infrastructure. Along with formal financial institutions such as commercial banks, cooperative bodies and non-banking financial companies (NBFCs), there is a wide network of informal entities including money-lending agencies that are engaged in the business of accepting deposits and lending money. Commercial banks play a lead role in the financial sector: they account for four-fifths of the quantum of deposits and two-thirds of the credit outgo of all financial institutions. Of the 51 commercial banks operating in the State through a network of 3,345 branches, six are Kerala-based (the public sector State Bank of Travancore and five `old' private sector banks). Kerala accounts for 5 per cent of the total number of bank offices, 4.6 per cent of all deposits and 3.6 per cent of credit disbursed by commercial banks in the country. Despite a high density of population, the average population per bank branch is significantly lower in Kerala compared to the national figures. Two major distinguishing features of the working of commercial banks in Kerala are their success in deposit mobilisation, especially in the matter of deposits from non-resident Indians, which account for half of the total quantum of deposits, and an apparent lower disbursement of credit.
Without doubt, the activities of commercial banks in Kerala are focussed more on deposit mobilisation than on credit expansion. This is evident from the fact that Kerala has a lower share in terms of advances than its share in terms of deposits at the national level. Further, the annual growth of deposits in Kerala during the period from 1985 to 2002 has been higher (17.3 per cent) than the growth of advances (14.6 per cent). Advances made from commercial banks have recorded a growth of 14.6 per cent during the period between 1985 and 2002, although the growth has been slower than in the matter of deposits. The rate of growth improved considerably from 1993. Between 1985 and 2002, the growth of credit in Kerala (at 14.6 per cent) was very close to the rate of growth of credit at the all-India level (15.9 per cent).
The focus of discussions with regard to commercial banks is centred on their relatively low level of credit deployment, which is measured in terms of the credit-deposit ratio (CDR), that is, the amount of credit disbursed out of deposits mobilised from within the State. This low level of deployment is not a new phenomenon. In recent times, what has been most striking is not the degree to which the CDR rules below the national average, but the widening of the two figures. Since 1991, the CDR in the State has been declining faster than the rate of decline at the all-India level, or declining even when the figure has remained steady at the national level. This has been particularly so since 1994. For the period between 1995 and 2002, on an average the CDR in Kerala was 13.2 percentage points lower than the ratio at the all-India level. However, following economic reform measures initiated recently by the State and the consequent improvement in the investment climate, there is some sign of a rise in credit deployment. Outstanding advances increased by 30.4 per cent, or Rs.5,836 crores, between March 2001 and December 2002. Accordingly, the CDR improved from 42.8 per cent to 44.6 per cent.
A regional comparison shows that the average CDR during the period from 1995 to 2001 in Kerala was 44 per cent as against the figure of 89.6 per cent in Tamil Nadu, 71.6 per cent in Andhra Pradesh, and 67.6 per cent in Karnataka. Hence, it may not be inappropriate to infer that deposits mobilised from Kerala are not being fully ploughed back into the State's economy.
The level of bank credit can be better assessed in comparison with the growth of the economy - in terms of State income. The figure for bank advances as a percentage of State income was higher than the figure at the all-India level. However, the problem is the decline in the proportion during the 1990s in Kerala (from an average of 37.7 per cent during the period between 1985 and 1990, to 27.9 per cent during the period between 1996 and 2002), when it was rising at the all-India level (25.2 per cent to 27. 6 per cent). Thus it appears that credit continues to grow at a trend rate, without being responsive to the requirements of credit that have arisen as a consequence of the faster growth of State income in recent times.
Another indicator of the low level of deployment of credit in Kerala is the estimate of credit per account (the average amount of credit given to the borrower), which was Rs.51,638 in 2001. It is the lowest among the major southern States: the all-India average is Rs.1,02,824. Interestingly, the number of credit accounts per thousand population in Kerala was relatively higher at around 116 in 2001 as against around 85 in the other southern States. From these facts, it appears that banks in Kerala are extending credit to relatively more number of people, but the amount of credit provided per account is low. The small size of a majority of land holdings, fewer number of medium and large scale industries compared to all-India figures, the small size of small scale industries and the absence of bigger service providers, among other factors, can be the reasons for the lower quantum of credit per account.
The low level of credit deployment in the State can be attributed to the lack of a development strategy, low credit absorption capacity owing to the weak state of the agriculture and industry sectors, the poor investment climate, labour problems, a weak infrastructure, a shortage of professional skills and an attitude of risk-aversion among the people, the limited geographical area available for large industries, the continuance of a colonial pattern of export, and perhaps the reluctance of some banks to extend credit owing to non-viability of projects and the fear of likely defaults.
On this issue, the State government and a section of investors take the position that though banks are mobilising large amounts of deposits from the State, these are not ploughed back in the form of credit. On the other hand, banks say that they are not getting enough number of viable proposals that deserve to be financed. It is also possible to argue that one of the major reasons could be the absence of reform measures till recently. Perhaps there was an over-emphasis on the role of the public sector, based on the view that private capital is not in the interest of the State. It is possible that this approach hindered the growth of private initiatives in the State and that the lower credit expansion is a consequence of this situation.
The expansion of credit is intrinsically linked to the economic activity in the State. The State needs to evolve specific development strategies for growth based on the given resource base. Kerala has two specific advantages, namely, a highly educated and skilled pool of manpower, and natural beauty. Hence the State has to choose a development path based on knowledge-intensive industries and the promotion of tourism. This can improve credit deployment.
Decentralisation of planning provides scope for banks to expand credit. In order to facilitate this, it is necessary to integrate the credit plans of the banks with the plans of local bodies such as panchayats and municipalities. Since the financial position of most of the local bodies is weak and investments made by them may not provide sufficient monetary returns, it is not feasible for banks to finance directly projects undertaken by them. Besides, there are institutional and legal problems. However, it is possible to think in terms of the issue of bonds by financially sound local bodies (for example, as municipal bonds), with State government guarantee, which can be subscribed by the banks. In order to ensure timely repayment, the local bodies can create an escrow account out of the revenues from the projects financed.
The services sector now contributes more than half of the State's income. In recent times, banks were rightly focussing on this sector, especially through retail lending. Banks need to explore further the possibility of financing viable projects in sectors such as medical care, higher education, transport and retail trade.
The fact that private financiers are thriving in the State is an indication that the formal banking system is not able to meet the credit requirements of a section of society. The formal banking system should strive to garner the business done by private financiers through further penetration in the rural and semi-urban areas through suitable schemes. Given the profile of the neglected sections of society and their credit requirements, the best arrangement to link them to the banking system would be Self-Help Groups (SHGs), which could be promoted throughout the State.
Of late, there is a clear change in the investment climate in the State following economic reforms, and efforts are on to boost the level of private investment.
Dr. P.D. Jeromi is working for the Reserve Bank of India. The views expressed here are his own and not necessarily those of the RBI.
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