A segmented banking system can boost credit

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Despite the abundant liquidity provided by the RBI under Multipurpose Targeted Long-Term Repo Operations (TLTROs), there is no noticeable improvement in credit growth. Credit growth fell to 5.8% in FY21 from 6.14% in FY20, a 58-year low, according to an analysis by SBI Research.

But the recent “Greenwich Coalition Report” – a division of Crisil brings some joy. He says the big banks get a better share of business loans. SBI, ICICI Bank and HDFC Bank emerged as “2021 Greenwich Share Leaders”, while Axis Bank was “2021 Greenwich Quality Leader”.

The report further observes that the market penetration of SBI and private banks in business banking services has improved over the past five years. The SBI granted loans to 32% of companies in 2020, against 30% in 2016. Private banks provided 24% in 2020, against 17% in 2016.

The purpose of bank mergers is to make them big enough to improve their lending capacity. According to the Bank for International Settlements (BIS), India’s credit-to-GDP ratio, although slightly improved to 56% in 2020 from 52.4% in 2019, continues to lag far behind its peers. It is down from 64.8% in 2015, indicating that banks have not been able to align the pace of credit flows with GDP growth.

Small loan ticket size

The RBI’s “Basic Statistical Report – 2020” shows that out of 272.5 million bank borrowers, only 6 79,034, far less than 1 million borrowers borrow 10 million yen or more from banks. The bulk of borrower accounts are made up of small loans of less than 10 million euros. 95.7 percent of bank borrowers have loan limits of up to 1 million yen. It is striking that 77 percent of borrowers have loans below 0.5 million yen.

The lending policies of the major commercial banks are not yet aligned with the amount of loans. Obviously, the burden of borrowers small and tiny takes most of the time off the banks and adds to the costs of intermediation and paperwork.

The recent adoption of loan automation systems has started to de-clutter the process and improve operational efficiency, but there is still a long way to go and further reforms are needed in this area.

Universal loan system

As part of the universal banking system, we have large banks such as SBI which coexist with small cooperative banks. There is no defined policy on the type of borrowers who can apply to which type of banking agency. The universal loan policy provides an ecosystem where any type of borrower can borrow any amount from any bank branch, while what is needed is to encourage borrowers to go to responding banks. to their loan needs in terms of loan size. The proximity of a bank branch is now the only determining criterion.

A three-tier banking structure is gradually changing with the recent wave of mergers. Large banks with an international presence with an asset size exceeding 10,000 billion yen operate in the two private public banks.

Regional rural banks, small financial banks, payment banks, cooperative banks and cooperative credit societies are widely present in rural areas.

These banks have, over time, developed capacities that can be well harnessed for credit expansion. Even the skill sets for credit assessment of medium and large loans are different while small loans can be guided by a model. The sheer size of the borrower base can impact loan quality, as can the need to manage bad debt in the segment.

Banks offering loans of all sizes can therefore be counterproductive given their specializations and skills.

So now is the time to debate whether the big commercial banks can focus on lending above 1 million euros while the second group of banks can serve the retail community. The aim is to improve the quality of growth and create more resources for closer post-sanction credit monitoring. Large banks can forgo small loans to others and use their resources to develop a strong and large credit portfolio.

A high credit-to-GDP ratio is a key indicator of growth. A higher credit-to-GDP ratio indicates an aggressive and active participation of the banking sector in the real economy, while a lower number shows the need for more formal credit.

For Indian banks to move closer to their Asian counterparts, a new way of thinking will be needed. Secular bank lending practices cannot capitalize on the demographic dividend and serve a growing society. Harnessing the capacity of banks by allowing them to choose the right size of lending activities aligned with their innate specialized capacity in place of the current “one size fits all” approach may be a possible solution to improving credit flows.

The author is the former Managing Director – Strategic Planning, Bank of Baroda, Mumbai. Views are personal


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