Addressing the disparity in credit off-take across states is critical for inclusive growth.
The Credit Deposit Ratio (CDR) is a measure of the amount extended as loans by banks for every Rs 100 of deposits. Between the mid-1990s and early 2000, the CDR at all-India level was almost stagnant. There has been a turnaround in the flow of credit from the banking system since 2001: the CDR consistently improved from 56.7 per cent in 2001 to 58.2 per cent in 2004. It rose sharply in 2005 to 66 per cent and further to 75 per cent in 2007. There has been a moderation since then, as the financial crisis hit the economy. So by March 2010, the CDR stood at 73.3 per cent. As an indicator of the credit flow from banks, this ratio is monitored by the Reserve Bank of India (RBI), which in 1980 had advised public sector banks to achieve a CDR of 60 per cent in their rural and semi-urban branches on a continuing basis. (Click here for graph)
The banking system in India is significantly different across the country owing to the disparate economic, geographic and social characteristics. The extreme diversity in occupational structures and economic activity is reflected in the banking and financial statistics. Despite the RBI advisory for the last three decades, variations in CDR persist across the country, varying from about 134 per cent in Chandigarh to mere eight per cent in Lakshadweep. Among the states, Tamil Nadu and Andhra Pradesh top the list with a CDR above 100 per cent. Not far behind these is Rajasthan, with a CDR of 96 per cent. Karnataka, Haryana, Maharashtra and Gujarat are among the big states with a moderately high CDR in the range of 75-80 per cent. At the other end of the table, Goa and Bihar have the lowest credit off-take, with less than 30 per cent CDR. The north-eastern states of Tripura, Meghalaya and Arunachal Pradesh have a very low credit inflow while Uttarakhand and Jharkhand are the other two states with CDR less than 40. In 16 states, the CDR is less than 50 per cent.
Though the rise in the aggregate CDR over the last decade has been encouraging, raising the CDR in some states remains a concern. The RBI Governor recently flagged the issue for West Bengal, pointing to the need for large corporate investment to boost this ratio at least to the all-India average. When it comes to states with extremely low CDRs, from the point of view of the banks, to raise credit growth, they have to find creditworthy borrowers. This can be a problem in states like Bihar and in the north-east, where growth and development have been stymied for too long. To address this problem, the RBI is working through the State-Level Bankers’ Committees for capacity-building initiatives, with Financial Literacy cum Credit Counseling Centres and Rural Self-Employment Training Institutes in each district. Such widespread disparities in credit off-take go against inclusive growth, and fundamental issues need to be resolved to ensure that credit delivery gets a boost in less developed states.
Indian States Development Scorecard, a weekly feature by Indicus Analytics, focuses on the progress in India and across the states across various socio-economic parameters.
