GANGTOK, 06 Oct: A bank is a financial institution that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets.Lending by banks plays an important role in the development of the local economy. Credit flow pushes more money into the market and also enables the creation of assets, employment generation and various other indirect benefits.
With the numerous banks in the state one would expect the local economy to be flourishing. Which takes us to the question, is the desired credit flow present at all in the state? To understand the question first, let’s take a look at the kind of lending taking place.
The Reserve Bank of India has divided lending by banks into priority and non-priority sectors. Under the priority sector come loans for agriculture, micro and small enterprises, education, housing, export credit and others. The categories under priority sector are areas which do not really offer much profit for banks but at the same time are extremely important for the local economy.Non-asset building credit options like personal loans to buy a television set, etc which do not directly contribute towards the local economy come under the non-priority sector.
As per the RBI, “Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections”.
In order to ensure that these areas are not neglected by banks the RBI has set a minimum target of 40% Credit Deposit Ratio that the banks must achieve every yearin the priority sector.
Now what is Credit Deposit Ratio?CDR is the ratio of how much a bank lends out of the deposits it has mobilised. It indicates how much of a bank’s core funds are being used for lending, the main banking activity.This means that banks have to lend at least 40% of its total deposit as loans for categories falling under the priority sector.
The Credit Deposit Ratio in Sikkim has always hovered around the minimum requirement of 40% for the past many years. This is unfortunate since the all-India CDR of all Scheduled Commercial Banks [those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934] stood at 77.7 per cent in December 2012. Amongst the states, Tamil Nadu scored the highest CDR at 124.2 per cent in the same year.
One of the lowest CDRs recorded by a bank as per the latest quarterly report is at 2.6 % where the bank in question lent only Rs. 3,37,00,000 against total deposit of Rs 128,42,00,000. The same bank recorded an even lower 1.71% CDR in the previous quarter [as on 31 December 2012]. Interestingly, a private bank has recorded the highest CDR as per the latest quarterly report at 1061.8 %. The bank’s lending amounted to Rs. 433,04,16,000 against total deposit of Rs. 40,78,24,000.
RBI- Gangtok DGM, Anil Yadav, cites lack of awareness as one of the major reasons behind the state’s poor CDR performance. Referring to the agriculture sector, he says that farmers hesitate to apply for loans for agricultural purposes while bad loans in this sector where farmers fail to repay the banks has also forced financial institutions to be wary of handing out such loans.
“Farmers here still prefer to go to money lenders rather than approach a bank. There is still lack of awareness regarding the various benefits and schemes. For example, there is a 3% relief on the total interest of a loan if a farmer makes the regular interest payments on time. This means that the total interest rate of 7% gets cut down to only 4% if the payments are made on time”, he points out.
Another problem, Mr. Yadavi nforms, also lies to a certain extent with the state’s bureaucracy. “Applications for agricultural loans have to come through the concerned department and that too creates problems at times”, he states.The problem with regard to loans for micro and small enterprises, it is often said, is the lack of workable and innovative projects proposals. Loan applications are not good enough to be passed.
Lack of awareness also comes into play where malpractices are involved. An SBI official informs that there have been instances where Kisan Credit Cards [KCC] have been issued against a mortgage. Under the scheme a mortgage is only required if the limit of the KCC is above Rs 50,000.
Figures as on 31 March 2013 show that out of the total number of 26 banks in the state only 10 managed to fulfill the 40% CDR. Only two of these 10 are private banks while the rest are public sector banks. The total amount of deposit in all 26 banks was Rs 495,92,920,000 while the total amount of credit given out wasRs. 198,68,811,000.
An official with the lead bank also informs that the low rate of CDR in the state is a concern that is discussed in the State Level Bankers’ Committee [SLBC], District Consultative Committee [DCC] meetings time and again. “This has been going on for years but there has been no improvement”, he says. The function of the lead bank is to prepare the Service Area credit-Plans, Annual Action Plansetc; monitor the progress of the implementation of the credit plans; monitor the progress of the implementation of the special programme like IRDP, etc., (IRDP Integrated Rural Development Programme). Since it is a na¬tional programme separate targets are fixed for this programme within the credit outlays of the Service Area Credit Plans. These plans require institutional credit; convene Meetings of District Consultative Committee, District Level Re¬view Committee, Standing Committee, etc; co-ordinate the Efforts of Government, Developmental and Credit Agen¬cies, etc.
All the banks in the state have to submit their quarterly reports to the lead bank which in turn reviews these reports and communicates areas of concern to the controller of the banks - the regional heads or circle heads of the particular bank. “We point out the issue of low CDR rate to controllers of the banks every time but we cannot force them to do anything. We don’t have such powers. It is only the RBI which can try and do something about it”, the lead bank official informs.
The RBI AGM in turn informed that RBI has been pressurizing banks, adding that to address the issue in a stronger manner the government would have to write to RBI. “If the government writes to us to take up the matter then we would definitely do so but we have not received anything in writing till now”, said Mr. Yadav.
At the same time, he added thatevery bank has its own set of lending guidelinesand that RBI does not interfere with these guidelines.
To encourage banks to achieve the priority sector lending targets there is however a mechanism in place. Banks which fall short of achieving the 40% target have to contribute a certain amount to the Rural Infrastructure Development Fund [RIDF] established with NABARD and other Funds with NABARD/NHB/SIDBI/other Financial Institutions, as decided by the RBI from time to time. The achievement levels of priority sector lending as on the end of each financial year i.e. March 31 is taken into account by the RBI while setting the amount of funds that the bank has to contribute.
The RBI is also supposed to take into account the non-achievement of priority sector targets and sub-targets while granting regulatory clearances/approvals for various purposes. Even with such provisions in place, not much has improved. There are many loopholes that constrict RBI’s ability to take any strong action forcing banks to lend more. Banks seem to be happy to contribute to the RIDF instead of taking the risk to grant loans. Also it is not the branches here but the main bank that contributes to the RIDF. It is also not clear how much is being put in the RIDF. Private bankers and lead bank officials were not aware of this process and said they do not know if banks are contributing to the fund as mandated.
When it comes to private banks, it is another story altogether. Private banks don’t like taking any risks. Thus, the lending rate by private banks is even worse. Forget about the priority sector, private banks in the state are not giving out loans even in the non-priority sector [comprising largely of personal loans]. The primary reason cited for refusal of loan applications by the private banks is that the bank officials here have no sanctioning power. Most banks here come under the West Bengal or North East circle and the branches here cannot sanction loans.
“When someone comes to apply for a loan we tell them to first open an account with us. Then we tell them to wait for another six months or so, by which time we will have a loan officer who will process the loan. I have been telling this to customers for the past 6 years,” admits a banker at a private bank here.
It is not surprising that the private banks welcome those who want to open accounts and make deposits because that is its primary source of capital. However, when it comes to lending the banks are selective. It is not that the private banks have nothing to show as lending at the end of a financial year. These are however made up of large amounts given to a selective few individuals or establishments where there is no risk involved as far as repayment is concerned.
Now to answer the question asked in the beginning of this article. No there is not enough credit flowing in the local economy for any substantial development to be expected. Also, we do not know if the quality of the credit that exists is adding any value to the local economy. Many loans for agriculture and small enterprises end up being used for personal consumption.
With the numerous banks in the state one would expect the local economy to be flourishing. Which takes us to the question, is the desired credit flow present at all in the state? To understand the question first, let’s take a look at the kind of lending taking place.
The Reserve Bank of India has divided lending by banks into priority and non-priority sectors. Under the priority sector come loans for agriculture, micro and small enterprises, education, housing, export credit and others. The categories under priority sector are areas which do not really offer much profit for banks but at the same time are extremely important for the local economy.Non-asset building credit options like personal loans to buy a television set, etc which do not directly contribute towards the local economy come under the non-priority sector.
As per the RBI, “Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections”.
In order to ensure that these areas are not neglected by banks the RBI has set a minimum target of 40% Credit Deposit Ratio that the banks must achieve every yearin the priority sector.
Now what is Credit Deposit Ratio?CDR is the ratio of how much a bank lends out of the deposits it has mobilised. It indicates how much of a bank’s core funds are being used for lending, the main banking activity.This means that banks have to lend at least 40% of its total deposit as loans for categories falling under the priority sector.
The Credit Deposit Ratio in Sikkim has always hovered around the minimum requirement of 40% for the past many years. This is unfortunate since the all-India CDR of all Scheduled Commercial Banks [those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934] stood at 77.7 per cent in December 2012. Amongst the states, Tamil Nadu scored the highest CDR at 124.2 per cent in the same year.
One of the lowest CDRs recorded by a bank as per the latest quarterly report is at 2.6 % where the bank in question lent only Rs. 3,37,00,000 against total deposit of Rs 128,42,00,000. The same bank recorded an even lower 1.71% CDR in the previous quarter [as on 31 December 2012]. Interestingly, a private bank has recorded the highest CDR as per the latest quarterly report at 1061.8 %. The bank’s lending amounted to Rs. 433,04,16,000 against total deposit of Rs. 40,78,24,000.
RBI- Gangtok DGM, Anil Yadav, cites lack of awareness as one of the major reasons behind the state’s poor CDR performance. Referring to the agriculture sector, he says that farmers hesitate to apply for loans for agricultural purposes while bad loans in this sector where farmers fail to repay the banks has also forced financial institutions to be wary of handing out such loans.
“Farmers here still prefer to go to money lenders rather than approach a bank. There is still lack of awareness regarding the various benefits and schemes. For example, there is a 3% relief on the total interest of a loan if a farmer makes the regular interest payments on time. This means that the total interest rate of 7% gets cut down to only 4% if the payments are made on time”, he points out.
Another problem, Mr. Yadavi nforms, also lies to a certain extent with the state’s bureaucracy. “Applications for agricultural loans have to come through the concerned department and that too creates problems at times”, he states.The problem with regard to loans for micro and small enterprises, it is often said, is the lack of workable and innovative projects proposals. Loan applications are not good enough to be passed.
Lack of awareness also comes into play where malpractices are involved. An SBI official informs that there have been instances where Kisan Credit Cards [KCC] have been issued against a mortgage. Under the scheme a mortgage is only required if the limit of the KCC is above Rs 50,000.
Figures as on 31 March 2013 show that out of the total number of 26 banks in the state only 10 managed to fulfill the 40% CDR. Only two of these 10 are private banks while the rest are public sector banks. The total amount of deposit in all 26 banks was Rs 495,92,920,000 while the total amount of credit given out wasRs. 198,68,811,000.
An official with the lead bank also informs that the low rate of CDR in the state is a concern that is discussed in the State Level Bankers’ Committee [SLBC], District Consultative Committee [DCC] meetings time and again. “This has been going on for years but there has been no improvement”, he says. The function of the lead bank is to prepare the Service Area credit-Plans, Annual Action Plansetc; monitor the progress of the implementation of the credit plans; monitor the progress of the implementation of the special programme like IRDP, etc., (IRDP Integrated Rural Development Programme). Since it is a na¬tional programme separate targets are fixed for this programme within the credit outlays of the Service Area Credit Plans. These plans require institutional credit; convene Meetings of District Consultative Committee, District Level Re¬view Committee, Standing Committee, etc; co-ordinate the Efforts of Government, Developmental and Credit Agen¬cies, etc.
All the banks in the state have to submit their quarterly reports to the lead bank which in turn reviews these reports and communicates areas of concern to the controller of the banks - the regional heads or circle heads of the particular bank. “We point out the issue of low CDR rate to controllers of the banks every time but we cannot force them to do anything. We don’t have such powers. It is only the RBI which can try and do something about it”, the lead bank official informs.
The RBI AGM in turn informed that RBI has been pressurizing banks, adding that to address the issue in a stronger manner the government would have to write to RBI. “If the government writes to us to take up the matter then we would definitely do so but we have not received anything in writing till now”, said Mr. Yadav.
At the same time, he added thatevery bank has its own set of lending guidelinesand that RBI does not interfere with these guidelines.
To encourage banks to achieve the priority sector lending targets there is however a mechanism in place. Banks which fall short of achieving the 40% target have to contribute a certain amount to the Rural Infrastructure Development Fund [RIDF] established with NABARD and other Funds with NABARD/NHB/SIDBI/other Financial Institutions, as decided by the RBI from time to time. The achievement levels of priority sector lending as on the end of each financial year i.e. March 31 is taken into account by the RBI while setting the amount of funds that the bank has to contribute.
The RBI is also supposed to take into account the non-achievement of priority sector targets and sub-targets while granting regulatory clearances/approvals for various purposes. Even with such provisions in place, not much has improved. There are many loopholes that constrict RBI’s ability to take any strong action forcing banks to lend more. Banks seem to be happy to contribute to the RIDF instead of taking the risk to grant loans. Also it is not the branches here but the main bank that contributes to the RIDF. It is also not clear how much is being put in the RIDF. Private bankers and lead bank officials were not aware of this process and said they do not know if banks are contributing to the fund as mandated.
When it comes to private banks, it is another story altogether. Private banks don’t like taking any risks. Thus, the lending rate by private banks is even worse. Forget about the priority sector, private banks in the state are not giving out loans even in the non-priority sector [comprising largely of personal loans]. The primary reason cited for refusal of loan applications by the private banks is that the bank officials here have no sanctioning power. Most banks here come under the West Bengal or North East circle and the branches here cannot sanction loans.
“When someone comes to apply for a loan we tell them to first open an account with us. Then we tell them to wait for another six months or so, by which time we will have a loan officer who will process the loan. I have been telling this to customers for the past 6 years,” admits a banker at a private bank here.
It is not surprising that the private banks welcome those who want to open accounts and make deposits because that is its primary source of capital. However, when it comes to lending the banks are selective. It is not that the private banks have nothing to show as lending at the end of a financial year. These are however made up of large amounts given to a selective few individuals or establishments where there is no risk involved as far as repayment is concerned.
Now to answer the question asked in the beginning of this article. No there is not enough credit flowing in the local economy for any substantial development to be expected. Also, we do not know if the quality of the credit that exists is adding any value to the local economy. Many loans for agriculture and small enterprises end up being used for personal consumption.
MONEY IS WHAT MONEY DOES
Banks can create new money when they make a loan. However, banks can't lend out all the deposits they collect, or they wouldn't have funds to pay out to depositors. Therefore, they keep primary and secondary reserves. The percentage of deposits a bank must keep on reserve or Cash Reserve Ratio is determined by the Reserve Bank of India. It is the excess reserves that create money. Here is how it works (using a theoretical 20% reserve requirement):
You deposit Rs 500 in Your Bank. Your Bank keeps Rs 100 of it to meet its reserve requirement, but lends Rs 400 to Ms. D. She uses the money to buy a car. The Car Dealership deposits Rs 400 in its account at Their Bank. Their Bank keeps Rs 80 of it on reserve, but can lend out the other Rs 320 as its own excess reserves. When that money is lent out, it becomes a deposit in a third institution, and the cycle continues. Thus, in this example, your original Rs 500 becomes Rs 1,220 on deposit in three different institutions. This phenomenon is called the multiplier effect. The size of the multiplier depends on the amount of money banks must keep on reserve.
IS THERE AN IDEAL LEVEL FOR THIS RATIO?
The regulator does not stipulate a minimum or maximum level for the ratio. But, a very low ratio indicates banks are not making full use of their resources. And if the ratio is above a certain level, it indicates a pressure on resources.
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