Changing flow of bank credit

Sufficient and seamless flow of credit to different sectors of the economy in sync with its latent potentiality is necessary to ensure that the synergy of all sectors can combine together to step up growth. In fact, nationalisation of banks, introduction of lead bank scheme, formation of State Level Bankers Committee, design of priority sector lending norms mandating 40 per cent of Average Net Bank Credit (ANBC) to designated sectors and more importantly, the latest financial inclusion program Prime Minister’s Jan Dhan Yozana (PMJDY) with provision for nominal overdraft are some of the key policy initiatives to channelise bank credit to deserving sectors of the economy. The targets for sub-sectors of priority sector lending norms assigned for agriculture (18 per cent), small and marginal farmers (seven per cent by March 2016 and 8 per cent by March 2017), Micro Small and Medium Enterprises (MSME - 7 by March 2016 and 7.5 per cent by March 2017), 10 per cent to weaker sections and export credit of 2 per cent of ANBC of preceding year are also intended to ensure regulated flow of credit to the identified sectors. In sync with the contribution of various sectors to the growth of GDP, credit should flow to step up growth. Anaemic supply of bank credit can be detrimental to the growth prospects. The recent trends of decline in credit can be detrimental to the growth.

Trends of economic growth
In order to collaborate and link the flow of bank credit, mapping trends of economic growth in the last five years will be relevant to see if the flow of credit is in sync. It is noteworthy that due to the slowdown of the Chinese economy even IMF is looking at India as a rising star in emerging markets. The sufficiency of credit is equally essential to ensure that opportunities are not lost.
The data related to the growth of the economy indicates the continuous upsurge in service sector. Indian economy has been demonstrating resilience despite the ongoing global uncertainties and moribund growth elsewhere in the world. At the same time, agriculture and industry sector is playing a pivotal role in accelerating service sector that has the potentiality to generate employment in interdependent activities. Given such buoyancy, if the finance is adequately provided, these key sectors can scale up growth further. While government has been steadfast in not only expanding banking network but also in opening up various other options of developing domestic equity/bond markets. Further, the opening up of new sectors to overseas investments and raising the ceiling of existing sectors creates avenues to access funds. The calibrated easing of norms related to Foreign Direct Investments (FDI), Foreign Intuitional Investors (FII), External Commercial Borrowings (ECB), Foreign Currency Convertible Bonds (FCCB) and Participatory Notes (PNs) supplement flow of financial resources to the target sectors. Hence economic activities are funded by a combination of sources such as banks, non-bank finance companies (NBFCs) and overseas funds.
Trends of bank credit
It is implied that the efficient dispensation of bank credit is the backbone for economic growth. The pattern of distribution of bank credit to different key sectors is as follows:
Challenges of credit flow
While there could be challenges in precisely linking credit flow to the sectoral contribution of GDP, the trends would manifest distinctly that agriculture sector contributes 15.3 per cent to the economy and only 13 per cent of bank credit goes to this sector. Similar is the distortion in service sector which provides 53.4 per cent to the economy but credit flow is much less. There could be spill-over from one sector to the other, but unless enough bank credit flows to the robust sectors, productivity could be hindered. Banks can thus design suitable products and fine-tune credit delivery infrastructure to reach the grass root level of the economy.
Overseas funding
After the opening up of the economy, the overseas funds have begun to fund the domestic sector aiding to spur the growth. Such overseas funds can flow to any sector provided it qualifies to access such funds. Its trends are as under:
These pieces of statistics of distribution of credit, growth of the economy, contribution of each sector to the GDP will indicate that sufficient institutional credit is not available to the sectors which actually need it. Instead, more credit flows to the sector where it cannot be absorbed. Such overseas funds can supplement bank credit to strengthen the resource position. Among the overseas funds, the most stable portion is FDI which need to be attracted by offering better appreciation. Recently, retail sector is opened up. On the whole, looking at the performance of various sectors of the economy and flow of credit, much is desired on the supply side of credit to augment growth. Banks will have to be proactive to serve each segment of the economy to bring about rapid transformation of growth. The strategies for credit dispensation in banks need to be further fine-tuned to make it amenable to each sub-sector of the economy so that overall growth opportunities are not lost.

(The author teaches at the National Institute of Bank Management (NIBM), Pune. The views are his own)