Tamal Bandyopadhyay: Fasting, feasting

Even in the low interest rate regime, some 77,737 borrowers across the country "" both corporations and individuals "" raised credit worth Rs 6,915 crore at an interest rate of 20 per cent and above (as on March 31, 2003).

In percentage terms, this is a minuscule 1.2 per cent of the total outstanding credit in the system. These were not the only borrowers that remained untouched by the low interest rates wave. Another 1,00,544 borrowers raised Rs 16,814 crore at interest rates between 18 and 20 per cent.

In fact, a little over one-fourth of bank credit (27.1 per cent, to be precise) disbursed in fiscal year 2002-03 carried an interest rate of 15 per cent and above.

Another Rs 1,40,444 crore, that is, 25.1 per cent bank credit, was disbursed at rates between 12 and 14 per cent.

Coming to low interest rates, merely 0.1 per cent outstanding bank credit was raised at less than 6 per cent and 5.4 per cent; that is, just Rs 30,691 crore was raised at rates below 10 per cent.

Of the total pool of 29,64,568 borrowers (with above Rs 2 lakh credit limit), only 1,71,314 borrowers "" less than 6 per cent "" could raise money at below 10 per cent interest rates.

This is only one facet of the "imbalances" dominant in the Indian financial system. There are many more. But first, let's look at the path traversed by the system over the past three-and-a-half decades since 1969 when the idea of bank nationalisation was first mooted (the first set of 14 banks were nationalised in 1970).

In 1969, India had 89 commercial banks. By March 2004, this number had increased to 290. Again, in 1969, there were 73 scheduled commercial banks (SCBs). The number of branches during these 35 years jumped over eight-fold, from 8,262 to 69,071.

The growth has been outstanding in rural India where the number of branches increased from 1,833 to 32,227. In contrast, the number of branches in the cities grew at a slower pace, from 1,503 to 9,750.

The total deposit portfolio of all commercial banks swelled from Rs 4,646 crore in 1969 to Rs 15,42,284 crore and that of credit from Rs 3,599 crore to Rs 8,65,594 crore. Roughly, one bank branch was catering to 64,000 people in 1969.

Now, the number has reduced to 15,828. Per capita deposits during this period jumped from Rs 88 to Rs 14,313 and credit from Rs 68 to Rs 8,404. Undoubtedly, the Indian financial system has come a long way.

But still, the system has far too many rough edges. The imbalance is clearly visible in the distribution of branches and per capita deposit and credit.

Manipur, for instance, has one bank branch per 36,388 people "" almost two-and-a-half times the national average. On the other extreme are Chandigarh and Goa.

In Chandigarh, one bank branch caters to 5,156 people, and in Goa, the number is 5,423 "" roughly one-third of the national average.

In terms of zones, the north and south of the country have higher branch density: 12,585 people in the north and 12,630 in the south for one branch. The north-east has the lowest branch density with one branch catering to 22,180 people.

When it comes to per capita deposits, Delhi clearly outshines the others. It has a per capita deposit of Rs 1,14,090 "" over eight times the national average of Rs 14,131 in March 2004. That's not surprising "" Delhi has more millionaires than any other place in the country.

The comparable figure for Mumbai is not available but in Maharashtra "" including Mumbai "" the per capita deposit is Rs 34,010.

Chandigarh comes a close second to Delhi with Rs 1,06,505 per capita deposit. The next highest per capita deposit figure is for Goa, where the figure is Rs 59,282.

Rich and developed states like Punjab and Gujarat and even Kerala, which sees high remittances of money from west Asia, are way behind though the per capita deposit in these three states is above the national average.

The per capita deposit in Gujarat is Rs 16,586; Punjab Rs 25,259; and Kerala Rs 19,990.

When it comes to credit, Chandigarh steals the show with Rs 1,51,212 per capita credit, which is one-and-a-half time more than its per capita deposit.

Delhi comes a poor second with Rs 69,807 "" far lower than its per capita deposit. In Goa's case, too, the per capita credit at Rs 12,907, is far lower than the deposit.

In contrast, the picture in Maharashtra is a more balanced "" a per capita credit of Rs 27,668 against a per capita deposit of Rs 34,010.

The imbalances are glaring when you consider the concentration of branches in various states. For instance, although Uttar Pradesh has the highest number of branches at 8,213, it accounts for deposits of just Rs 1,19,333 crore.

In percentage terms, this is a measly 7.9 per cent of the total deposits of the banking sector. In contrast, Delhi with 1,540 branches offers a deposit base of Rs 1,83,080 crore, or 12.1 per cent of the national kitty.

Among the states, Maharashtra has the largest deposit base at Rs 1,53,569 crore, or 19.8 per cent of the total deposit portfolio of the banking sector.

This is higher than the individual deposit base of the entire eastern and central region, not to talk of the north-east. With this deposit base, Maharashtra accounts for 29.5 per cent (Rs 2,62,339 crore) of the credit slice of the entire banking system.

In other words, deposits raised in other parts of the country are deployed here in form of credit.

The entire western region accounts for one-third of the credit portfolio of the banking system and roughly one-fourth of the deposit portfolio.

If you don't count the north-east, central India attracts the least credit "" Rs 70,113 crore or 7.9 per cent of the total credit pie. Eastern India comes a close second with Rs 76,539 crore or 8.6 per cent share.

The credit share for each of these two regions is far lower than two individual states "" Delhi (12.6 per cent) and Tamil Nadu (9.9 per cent).

In Delhi's case, the credit and deposit portfolios almost match "" 12.1 per cent share of deposit and 12.6 per cent share of credit "" but Tamil Nadu accounts for a far bigger chunk of credit than deposit (9.9 per cent credit and 6.5 per cent deposit).

This emphasises the fact that money raised in other parts of the country is deployed in the state.

What does this flood of numbers imply? Essentially, it establishes two important points: some regions in the country are over-banked and under-serviced. A country of 1.1 billion people has about 250 million account holders.

But if you exclude those with multiple accounts, especially in metropolitan and urban bank branches, the number will drop drastically. There are only 3 million credit accounts with limits of over Rs 2 lakh. The total number of credit cards in force is around 10 million but the actual number of card holders could be around 5 million.

But the amazing part of the story is that despite lazy banking, the industry has been growing by 15 to 17 per cent a year. This is against the measly 1 to 2 per cent growth rate of European banks. Do we need to say more on why consolidation is needed?

Relocation of branches, redeployment of employees and re-engineering of business processes can take place only after the industry consolidates.