Archive for June 20th, 2007

Indian Banking sector – a simple analysis

June 20, 2007

I have made a mention of this report from RBI in my previous posts. I have commented some important findings from the report covering Financial Market Integration, G-Sec Markets and Equity and Corporate Debt Markets

This post covers the Banking structure in the country and credit markets.

The first question which often comes to mind is what are the different kinds of banks in India? The report says:

There are wide range of financial institutions exist in the country to provide credit to various sectors of the economy. These include commercial banks, regional rural banks (RRBs), cooperatives [comprising urban cooperative banks (UCBs), State co-operative banks (STCBs), district central co-operative banks (DCCBs), primary agricultural credit societies (PACS), state co-operative and agricultural rural development banks (SCARDBs) and primary co-operative and agricultural rural development banks (PCARDBs)], financial institutions (FI) (term-lending institutions, both at the Centre and State level, and refinance institutions) and non-banking financial companies (NBFCs) 

Thankfully, the report gives a very good picture of India’s Credit System here 🙂 And it also explains each institutions role as well.

How large is the credit market in India? Almost 54% of GDP and is increasing. Indian society is getting friendlier to credit.

Total Outstanding Credit by all Credit Institutions
1991 1,94,654 34.2
1995 3,47,125 22.7 34.3
2000 7,25,074 17.1 37.1
2001 7,94,125 9.5 37.8
2002 8,93,384 12.5 39.2
2003 10,77,409 20.6 43.8
2004 11,99,607 11.3 43.4
2005 14,81,587 23.5 47.4
2006 19,28,336 30.2 54.1
Compound Annual Growth Rate (Per cent)
1991 to 2000   15.7  
2000 to 2006   17.7  

How much Credit do each of the instituions give? Commercial Banks clearly have a major sharte in the credit system.

Distribution of Credit – Category-wise Share (Per cent)

    1991 2006
1. Commercial Banks 59.7 78.2
2. RRBs (and LABs) 1.8 2.1
3. All-India Financial Institutions 24.9 5.8
4. Urban Co-operative Banks 4.1 3.6
5. State Co-operative Banks 3.4 2.1
6. District Central Co-operative Banks 6.0 4.2
7. Primary Agricultural Credit Societies 3.3 2.5
8. SCARDBs 0.7 0.9
9. PCARDBs 1.0 0.7
All Institutions 100.0 100.0







Whom do Commercial banks give most of the credit to? The preference has moved from Industry to Services sector. Within services, the credit is being increasingly given as Housing Loans.

Table 4.5: Distribution of Outstanding Credit of Scheduled Commercial Banks (Per cent to total credit)
Sector Mar-90 Mar-95 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
Agriculture 15.9 11.8 9.9 9.6 9.8 10.0 10.9 10.8
Industry 48.7 45.6 46.5 43.9 41.4 41.0 38.0 38.8
Transport 3.2 1.9 1.8 1.6 1.4 1.2 1.3 1.2
Personal Loans and Professional Services 9.4 11.3 14.4 15.8 16.8 19.6 25.3 27.0
of which:                
Loans for Purchase of Consumer Durables 0.4 0.3 0.6 0.6 0.5 0.4 0.5 0.6
Loans for Housing 2.4 2.8 4.0 4.7 5.0 6.5 9.7 11.0
Trade 13.9 17.1 15.6 16.6 15.4 13.8 11.5 11.2
Financial Institutions 2.1 3.8 4.8 4.9 5.7 6.7 6.7 6.4
Miscellaneous / All Others 6.8 8.5 7.1 7.5 9.5 7.7 6.2 4.6
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

What is the tenure of credit by Commercial Banks. As economies and financial systems mature one would expect to see movement in favor of long-term credit. Thankfully, we see it in case of India.

Type of Credit to Industry By Banks (% of total)
  Short-Term Loans Medium term Long Term
1995 82.5 5.8 11.6
2000 74.3 6.8 18.9
2005 52.4 10.6 37.0

I don’t want to praise the report more. One of the best on India’s Financial System and markets.


Assorted Links

June 20, 2007

1. A number of recent papers on India and China. Marginal Revolution pointsto a paper from Fogel. New Economist points to two papers one on China which focuses on rising inequality, and one on Indiawhich cites reasons for worsening public deficit.

2. Rodrik mentions about 15 commandments of economics. All are funny and true.

3. Global Financial Capitalism…??? Rodrik critiques an article written by Martin Wolf.

4.  Ajay Shah in BS writes a very good piece on India’s education system:

A lot of extremely successful people in the world have a college degree in fields like history or the liberal arts, where no tangible technical skills were learned. A lot of top CEOs frankly say that their MBA education was useless. An extensive research literature finds remarkably little impact of either elementary or higher education on GDP growth. 
Universities may play a role in socialisation and in screening but the education that is imparted there is much less important in the working years than is presumed to be. In other words, the Indian model of having difficult entrance examinations coupled with no teaching has its strengths, for it achieves the things that matter (screening and socialisation) while skimping on the things that matter less (learning history or economics in an undergraduate programme). 
If learning does not happen in universities, then where does it happen? What appears to dominate is “learning by doing”, the learning that is acquired at the workplace. People learn inside firms, and their learning is best when the firm is in a brutally competitive and globalised market. 
In this respect, there is something of great importance which has been going on in India from 1991 onwards. For 16 years now, we have been building a new cadre of individuals who have learned inside competitive firms with an increasing degree of globalisation. Trade barriers have come down, capital controls have eased, and a middle manager in Tata Steel today is competing in the world market for steel. Ten years of experience in Tata Steel is worth more in building top-quality staff for running a steel company than any university education that I can think of.

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