The objective of this paper is to analyze credit deposit ratio in four states of India namely Bihar, Punjab, Maharashtra and Tamil Nadu. Many factors that affect the credit deposit ratio are taken into consideration like number of bank branches in the state; types of deposits given by banks - Savings, Current and Term; credit amount given to agriculture, industries and individuals; credit disbursement in rural, semi-urban, urban and metropolitan areas; and the amount of sanctioned credit utilized within and outside the state. For many years, Bihar has a very low credit deposit ratio while Tamil Nadu has a very high credit deposit ratio. Maharashtra which is the backbone of the growth of the country is performing well while Punjab is close to the nation's average CD ratio. So, the paper combines all the factors that affect the credit deposit ratio and analyzes the reasons for such a disparity in credit deposit ratio among the four states and tries to find out solutions which could help in improving the low credit deposit ratio in states like Bihar and Punjab.
Introduction
Economic growth is an essential parameter for measuring and raising the standard of living of the people. The economic development of a country depends largely upon its financial and banking structure. In the long run the larger the proportion of financial assets to real assets, the greater will be the scope of economic growth. Investments and savings are the major components of economic growth. To sustain growth, continued investment in the growth process is necessary. Since finance is an important input in growth process, it plays a crucial role in the economy. A more efficient composition of real wealth is obtained by the promotion of financial assets which provide incentive to savers to hold a large part of their wealth in financial form. An increasing rate of savings correlates with the increase in the proportion of savings held in the form of financial assets- relative to tangible assets.
Banks are important financial institutions of a nation. Growth of a country whether developed or developing largely depends upon the banks. A bank acts as a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses. Individuals or institutions deposit their surplus funds with banks for the purpose of earning interest and the safety of funds. Banks pay reasonable interest on the deposits. Banks grant loans from this amount and charge interest at a higher rate either to individuals or institutions like industrialists, farmers, traders and self employed persons. The difference in rate of interests is called spread of the bank. After deducting the costs which are incurred by the bank from the spread, bank gets its profit.
Deposits are of three types namely (i) Saving (ii) Current and (iii) Term deposits. Savings deposit is the money saved and deposited by individuals or business men. Banks offer a flat interest rate for the amount. Interest rate of course entirely depends upon the nature, type and size of the bank and it varies from bank to bank. Savings accounts can also have certain withdrawal amount or shopping amount limitations per day. Most banks don't offer an overdraft facility on savings accounts. So, through savings deposit banks can maintain some form of liquidity with them. On the other hand, current deposits are primarily made by people for business purposes. Most banks don't offer any interest on the amount deposited. These types of deposits do not have any restrictions and have overdraft facility and therefore banks lose their liquidity. A term deposit is a deposit for a fixed term with maturity ranging anywhere from a month to few years. Banks generally pay interest on the amount. So, a bank can chose between different types of deposits depending upon the liquidity requirement, profit etc.
One of the important functions of the banks is the credit creation which is in accordance to credit policy of Reserve Bank of India (RBI). Money can be created by two sources, first RBI can issue or introduce new money into the economy or it can infuse new money into the economy by purchasing financial assets. Second, the new money introduced by the central bank is multiplied by commercial banks through fractional reserve banking, expanding the amount of broad money in the economy the credit creation process. For fractional reserve banking, bank accepts deposits from people and after keeping some reserve (determined by CRR), it lends out the rest of cash as credit. Thus, credit creation increases the money supply in the economy and the credit policy and investment made by a bank can greatly influence the money quality in the economy.
Banks also have regulatory functions under the RBI policies in the economy. RBI controls the inflation in the economy by controlling the credit amount that the banks can give out through Cash Reserve Ratio (CRR). CRR works effectively in controlling the credit amount in the economy and, thereby, keeping a check on the inflation.
Loans given by banks are of two types namely: - (i) Long Term and (ii) Short Term. Long term loans are generally given to industries at high interest rates for a long duration whereas short term loans are normally given to farmers, traders, individuals at low interest rates for a shorter duration. Long term loans greatly affect the liquidity of the bank since the credit given by the bank gets locked with the debtor and can only be repaid after a certain period of time. So, a bank has to choose a policy that provides maximum profit with maximum liquidity with a trade-off between the two types of loans.
The Credit Deposit (CD) ratio is the proportion of loan-assets created by banks from the deposits received. Mathematically, Credit Deposit Ratio (D Narayana, 2003) can be written as:-
Higher the ratio, higher the loan-assets created from deposits i.e. higher CD ratio which reveals the efficiency with which the commercial and financial intermediaries are tapping savings from the available sources and channelizing these to various productive activities of the economy. Corollary, low credit deposit ratio indicates the low productive activities of the economy.
Data Analysis - Comparative Study of States
Table 1 shows the population and area (per sq. Km) of the four states. Of all the states Maharashtra has maximum population but minimum population density due to very large area as compared to other states. Bihar has maximum population density due to more population and less area of the state. In comparison to Bihar, Tamil Nadu and Punjab have less population density and less population. Area of Tamil Nadu and Punjab is less as compared to Maharashtra.
Table 1: State Statistics
State
Population
Area km2
Density (per km2)
Bihar
82,998,509
88,752
881
Punjab
24,358,999
50,362
484
Maharashtra
96,878,627
307,713
315
Tamil Nadu
62,405,679
130,058
480
Source: Census 2001
Credit and Deposit trends for last ten years
Table 2 gives the credit deposit ratio of the four states for the last 10 years. It shows that the credit deposit ratio has been on upward trend except last 2 years due to recession which decreased rate of increase in both credit and deposit amounts in the four states. Tamil Nadu has maximum credit deposit ratio while Bihar has minimum CD ratio out of all the four states (27%). Bihar is also among the states after some of the north eastern states which has very low CD ratio in the country. Such a low credit deposit is a major concern for both the state and the nation and steps must be taken to improve the ratio in the state. Maharashtra being financial backbone of the country is doing well (91%) while Punjab is close to the nation's average credit deposit ratio (72.6%).
Table 2: Credit Deposit Ratio in last 10 years (in %)
CD Ratio
2000
2001
2002
2003
2004
2006
2007
2008
2009
2010
Punjab
39
41
42
42
43
50
57
66
67
66
Bihar
22
21
21
23
25
28
30
32
28
27
Maharashtra
86
86
92
94
82
95
102
97
94
91
Tamil Nadu
89
91
85
91
93
101
110
114
115
108
Figure 2 and Figure 3 gives the credit and deposit trends for the four states for last 10 years. It shows that both credit and deposit amounts in all the four states have increased for the last 10 years. Maharashtra has maximum credit and deposit amount with Tamil Nadu, Punjab and Bihar following it. The relative credit and deposit amount of Bihar and Punjab to Maharashtra is almost one tenth and one ninth respectively. This shows that Maharashtra completely outweighs Bihar and Punjab. Bihar has minimum credit and deposit amount as compared to rest of the three states which results in overall low credit deposit ratio of the state (27%). The credit deposit ratio of Bihar is way below than the national average credit deposit ratio (72.6%). The credit amount in Maharashtra and Tamil Nadu has increased at much faster rate as compared to deposit amounts over the last 10 years which has improved the overall CD ratio for both the states. In Bihar and Punjab, the deposits have grown at higher rate than credits which did not lead to much improvement in the overall credit deposit ratio for the states. The reasons for such a disparity in the CD ratios of the states will be analyzed in the paper with solutions for improvement of CD ratio being given at the end of the paper.
Bank Branch density
The number of bank branches is an important benchmark to analyze the CD ratio of the state since more number of bank branches will lead to more credit disbursement and deposits and vice versa. Table 3 reveals the number of bank branches per lakh population in four states. Bihar has minimum number of bank branches per lakh population i.e around 5 branches per lakh population whereas Punjab has maximum number of branches (13 branches per lakh population). Maharashtra and Tamil Nadu are in between. One of the reasons for low credit deposit ratio in Bihar is very less number of bank branches in the state. Since the bank branches are less, the number of credit and deposit accounts are less which results to low credit and deposit amount and low credit deposit ratio.
Table 3: Bank Branches per 1,00,000 population
State
Population
No. of Offices
Branches per 1,00,000 population
Punjab
2,42,89,296
3,324
13.69
Bihar
8,29,98,509
3,904
4.70
Maharashtra
9,67,52,247
7,767
8.03
Tamil Nadu
6,63,96,000
6,080
9.16
Sector and Area-wise Credit Disbursement
Bihar: Table 4 shows that the credit disbursement in industry is low in all regions as compared to other states which depict less industrial activity in Bihar. Also, in other sectors like agriculture, personal loans overall disbursed credit is comparatively less. Surprisingly, individuals have maximum share of the credit disbursed in the state after agriculture activity i.e. mainly in rural region. So the reason for very low credit deposit ratio in Bihar is less business activity, which also discourages the inflow of credit from other states.
Table 4: Sector and Area-wise Credit Disbursement in Bihar
Occupation
Rural
Semi Urban
Urban
Metropolitan
No. of
Credit
No. of
Credit
No. of
Credit
No. of
Credit
A/C
Amount
A/C
Amount
A/C
Amount
A/C
Amount
Agriculture
14,67,196
4,78,325
5,11,877
2,20,570
1,24,669
1,27,814
6,213
7,125
Industry
68,484
56,661
25,080
34,249
10,319
51,604
4,706
79,880
Transport Operators
22,418
10,075
7,586
6,118
5,435
6,320
2,872
5,972
Professional & other services
46,702
20,104
19,217
17,041
10,821
26,522
5,809
21,710
Personal loans
2,29,624
1,50,389
1,98,560
1,81,617
1,86,663
2,19,516
1,10,668
1,45,608
Trade
3,80,066
1,23,486
1,41,732
95,331
54,443
90,827
12,512
51,495
Finance
6,339
2,658
1,680
1,544
220
2,052
425
3,084
All others
88,978
34,558
28,939
16,378
16,330
19,321
5,718
6,376
Punjab: Table 5 reveals that Punjab shows impressing industry activity in all regions (except for rural areas), counting for the most of the credit sanctioned in the state. This explains the rapid credit deposit ratio of state in last 10 ten years. The table shows that industrial sector has surpassed the agriculture based economy of Punjab which is a good sign for a developing Nation like India. But still the total amount of credit sanctioned here is less compared to Maharashtra and Tamil Nadu. So, there is wide scope for improvement in credit deposit ratio in Punjab.
Table 5: Sector-wise Credit Disbursement in Punjab
Occupation
Rural
Semi Urban
Urban
Metropolitan
No. of
Credit
No. of
Credit
No. Of
Credit
No. of
Credit
A/C
Amount
A/C
Amount
A/C
Amount
A/C
Amount
Agriculture
5,26,390
7,54,977
3,23,562
5,64,374
78,939
2,76,011
17,889
86,035
Industry
21,937
2,10,609
34,693
6,08,400
36,287
14,68,386
48,942
11,48,760
Transport operators
3,188
6,441
2,336
5,743
4,515
18,700
4,567
22,397
Professional & other services
13,682
54,430
23,406
79,087
19,973
1,53,314
12,318
75,108
Personal loans
1,20,826
1,81,360
2,10,816
3,81,462
2,43,763
4,69,363
1,56,150
3,07,907
Trade
40,214
54,142
48,363
2,29,290
35,555
3,04,902
20,521
1,88,740
Finance
1,230
2,834
803
10,654
497
8,936
664
3,768
All others
23,956
24,989
25,984
35,869
20,002
1,05,063
22,798
36,683
Maharashtra: Table 6 shows that in Maharashtra, overall disbursement of credit in rural, semi-urban and metropolitan areas is maximum to industrial sector followed either by agriculture or personal loans. This lifts up the overall credit deposit ratio to a significant high level in the state. The number of accounts is also very large in number in all the regions i.e. rural, semi-urban, urban and metropolitan which shows that people have access to bank branches in the state and they have easy credit access.
Table 6: Sector-wise Credit Disbursement in Maharashtra
Rural
Semi-Urban
Urban
Metropolitan
Occupation
No. of
Credit
No. of
Credit
No. Of
Credit
No. of
Credit
A/C
Amount
A/C
Amount
A/C
Amount
A/C
Amount
Agriculture
1023110
750810
694695
562382
136883
307133
2475779
1146190
Industry
23607
963462
22734
590543
31642
987011
465842
32287504
Transport operators
11185
30692
6563
12009
7125
25421
63596
2750602
Professional and other services
46644
175610
38312
83540
31466
166344
91714
7835607
Personal loans
308505
346774
437165
576810
552894
1086180
19138921
9063555
Trade
117934
385640
119340
349500
85418
233605
124015
6492602
Finance
11759
19203
6680
4973
1943
6487
6,042
10050292
All others
26918
11650
28396
25091
38955
54839
233721
1169881
Tamil Nadu: Table 7 depicts that Tamil Nadu has very high availability of credit in industry and agriculture sectors in all regions, much more than that of Maharashtra. Interestingly Tamil Nadu has high investment in urban and semi urban region which was lacking in all above states, this is also a reason for high credit deposit ratio in Tamil Nadu.
Table 7: Sector-wise Credit Disbursement in Tamil Nadu
Rural
Semi-Urban
Urban
Metropolitan
Occupation
No. of
Credit
No. of
Credit
No. of
Credit
No. of
Credit
A/C
Amount
A/C
Amount
A/C
Amount
A/C
Amount
Agriculture
27,17,797
8842,60
23,41,514
9245,35
6,16,136
4389,74
1,11,753
4081,38
Industry
67,966
5035,51
1,02,164
8319,68
98,671
28193,75
80,053
44276,14
Transport operators
5,718
270,32
10,166
361,81
14,033
702,21
12,146
1334,84
Professional and other services
85,404
573,03
76,094
1307,48
75,454
2914,51
53,640
13327,97
Personal loans
3,99,578
3335,44
7,75,075
7481,19
8,18,065
13131,23
42,14,865
36040,33
Trade
1,21,115
857,27
1,70,708
2615,91
1,07,094
4804,53
59,335
6676,85
Finance
6,167
64,78
8,593
97,76
7,463
156,89
8,693
10060,71
All others
3,23,823
1336,62
3,48,425
1966,60
2,92,623
3185,03
2,61,812
7386,85
Comparison of states: Table 8 shows that major credit in Maharashtra and Tamil Nadu is disbursed to industries and individuals which is the major reason for a very high credit deposit in both the states. In Bihar, majority of the credit is disbursed to agriculture sector and individuals which leads to a very low credit amount, and thereby pulling the credit deposit ratio down in the state. In Punjab, major credit disbursement is to industries which improve the credit deposit ratio of the state.
Table 8: Percentage of Credit Disbursement according to sectors in four states
Occupation
Bihar
Punjab
Maharashtra
Tamil Nadu
Agriculture
36.03
21.34
3.52
11.98
Industry
9.61
43.61
44.34
37.28
Transport operators
1.23
0.68
3.59
1.68
Professional & other services
3.69
4.59
10.52
9.88
Personal loans
30.12
17.01
14.10
22.83
Trade
15.60
9.86
9.50
7.95
Finance
0.40
0.33
12.83
4.49
All others
3.31
2.57
1.61
3.91
Total
100
100
100
100
Sanctioned and Utilised Credit
Table 9 shows that the credit sanctioned in Maharashtra is comparatively high but the amount of this credit utilised in state is les that is 85.48%, this counts for the low credit deposit ratio (as per utilisation) in Maharashtra although credit deposit ratio (as per sanction) is more here. In contrast Tamil Nadu has high credit deposit ratio (as per utilisation) for the reason that the credit utilisation is 98.74% and also credit inflow from other states is large here resulting in overall good credit deposit ratio in Tamil Nadu. Punjab and Bihar has almost same credit deposit ratio in both cases. According to Expert group (Thorat Committee), "Although CDR is generally computed on the basis of data relating to credit outstanding as per the place of sanction, a better indicator is credit as per (the place of ) Utilization". For Tamil Nadu, it is the positive sign that CD ratio according to credit utilization is more as compared CD ratio according to credit sanctioned.
Table 9: Sanctioned and Utilised Credit in four States
State
Total Credit
Sanctioned
in the State
Credit
Utilised in
the State of
Sanction
Credit
Sanctioned
in the State
but Utilised
in Other
States
% credit
utilised
in state
Credit
Utilised
in the State
but Sanc-
tioned in
Other States
Credit-Deposit Ratio
As per
Sanction
(per cent)
As per
Utilisation
(per cent)
Punjab
79,03,364
74,77,865
4,25,499
94.61
4,00,872
65.7
65.5
Bihar
23,30,769
22,19,990
1,10,780
95.24
94,341
26.8
26.6
Tamil Nadu
2,65,32,530
2,62,00,595
3,31,935
98.74
20,83,885
108.1
115.2
Maharashtra
9,10,38,963
7,78,22,153
1,32,16,810
85.48
7,29,792
91.2
78.7
. Deposit Types
Figure 4 shows the different types of deposits made in the four states. Deposits are mainly of three types: - Current, Savings and Term deposits. Percentage of term deposits is maximum in Tamil Nadu, Maharashtra and Punjab. Since term deposits are long term deposits, bank can give credit out of the deposits to industries for long term credit requirement. In Bihar, percentage of savings deposit is maximum, so banks in Bihar cannot give long term credit to industrial sector. Table 5 proves the point that major credit in Bihar is disbursed to agriculture and individuals which is a low and short term credit.
2.6. Region-wise Credit Deposit Ratio
Table 10 shows the overall picture of the credit deposit ratio in various regions of the four selected states. Overall analysis of this table reveals that semi urban and urban regions lag behind in the performance of the credit and deposit ratio due to less agriculture and industrial activities in these regions. Tamil Nadu shows the highest credit deposit ratio in all four regions and Bihar has the lowest. Punjab and Maharashtra lies in between Bihar and Tamil Nadu.
Table 10: CD Ratio in various regions in four states
Region/State
Bihar
Punjab
Maharashtra
Tamil Nadu
CD Ratio
CD Ratio
CD Ratio
CD Ratio
Rural
0.35
0.51
0.73
0.87
Semi urban
0.25
0.48
0.54
0.79
Urban
0.25
0.57
0.43
1.13
Metropolitan
0.20
1.17
0.95
1.20
2.7. Statistical Analysis
F-test analysis of variance (ANOVA) was used to analyze the variation between the credit deposit ratios of the four states. Data of table 2 was used to analyze the ratios. The average credit deposit ratios of four states i.e. Bihar, Punjab, Maharashtra and Tamil Nadu for 10 years were taken to be µB, µP, µM, µT respectively. The null hypothesis was µB = µP = µM = µT. Alternative hypothesis was taken that the average credit deposit ratios of the four states is significantly different. The level of significance or α was taken to be 0.05. The computed value of F statistic came out to be 140.19 whereas the ideal value should be around 2.87. So, we rejected our null hypothesis and we concluded that there is significant difference and disparity in credit deposit ratios of the four states for the last 10 years.
Conclusion and Suggestions
The paper analyses the credit deposit ratios in four states of India i.e. Bihar, Punjab, Maharashtra and Tamil Nadu. The data reveals that the Tamil Nadu has the maximum credit deposit ratio while Bihar has minimum credit deposit ratio. Punjab is very close to national average while Maharashtra being the financial hub of the nation is performing well in terms of credit deposit ratio. Bihar's credit deposit ratio is way below the statutory requirement given by RBI policy under which the commercial banks must maintain a 60% credit deposit ratio in the rural and semi urban region of the state.
In a circular dated June 18,1980 issued to public sector banks, the RBI advised them that," While it is not necessary that this ratio should be achieved separately branch-wise, district-wise or region-wise, the banks should, nevertheless, ensure that wide disparity in the ratios between different states/regions is avoided in order to minimize regional imbalances in credit deployment. The situation may be as a result of various factors such as lack of necessary infrastructure, varying ability of different regions to absorb credit, etc. We would, however, like you to review the performance of your bank in such areas and take necessary steps to augment the credit flow." The instructions were reiterated to public sector banks in February 1995.
Bihar is one of the states in India having very low credit deposit ratio. Data analysis shows that the reason for low credit deposit ratio in Bihar is due to very low number of bank branches in the state. The credit disbursement in Bihar is mainly to agriculture sector and individuals which lead to a very low credit amount for the state. Industrial projects have to come up to improve the CD ratio in the state. The deposits which are made in banks are of savings deposits rather than term deposits. So, banks must encourage people to make term deposits so that banks can give out long term credit out of the deposits made in the banks. On the positive side, both credit and deposit amount has increased over the last 10 years which can lead to improvement of credit deposit ratio in future years to come.
In Punjab, major credit disbursement is to industries and agriculture which improves the credit amount for the state. The major deposits in the banks are term deposits through which banks can give out long term credit. The number of bank branches per lakh population in the state is also very high. The reason for low credit deposit ratio in Punjab as compared to states like Maharashtra and Tamil Nadu is due to low CD ratio in rural (51%) and semi urban (48%). The CD ratios in both the regions are well below the statutory requirement of 60%. Industrial credit must pick up in these regions to improve the overall CD ratio.
Maharashtra is the financial backbone of the country. The amount of credit and deposits which is done in the state is maximum out of all the other three states i.e. Bihar, Punjab and Tamil Nadu. The reason for slightly low CD ratio as compared to Tamil Nadu is due to the sanctioned credit for the state being utilised in other states. Banks must utilise the credit within the states to improve CD ratio as per utilisation which is very low at about 79%.
Tamil Nadu is the state having highest CD ratio (more than 100%) among all the states in India which shows that Tamil Nadu has more credit amount than deposit. Both deposit and credit amount have increased over the last 10 years in the state with credit amount increasing at much faster rate as compared to deposit amount. The reason for such high credit deposit ratio is due to major credit being disbursed to industrial sector in all the regions i.e. rural, semi-urban, urban and metropolitan which leads to high credit amount in the state. Also, credit sanctioned in other states is being utilised in Tamil Nadu. The deposits are also term deposits which help banks to give out long term credit for industrial projects and thereby earning high interest rates on the loans.
Rapid industrialization, modernization of agriculture and improvement of social, physical and financial infrastructure are keys to ensure faster growth which can lead to improvement of credit deposit ratio in states like Bihar and Punjab.
Improvement in credit ratio cannot be done in a short period of time but it will require a long term effort to improve it. CD ratio is dependent upon infrastructural development and linkages and both of them will require a long term effort. Credit can be easily dispensed in agriculture sector as compared to industry since agriculture sector has the potential to absorb more credit and is more developed than industry. But without the development of credit system in industrial sector, credit deposit ratio cannot improve in states having low CD ratio. There is a need to divert from agricultural activities to investments & tertiary sectors.
It is important that all efforts are made by the bank for creating an appropriate recovery and lending climate. The bank has not only to fill the credit gaps but also to provide after-service complementary to credit availability that would encourage entrepreneurial initiatives. Banks should start specialized branches to increase credit disbursement to existing industrial outlets. These branches should also promote establishment of new industries in the region by identifying viable units of capable entrepreneurs in the states.
While heavy industries can absorb a substantial amount of credit, there is sufficient scope for the development of tiny as well as indigenous industries in Bihar and Punjab, which have a large employment potential. It is possible to accelerate the development of tiny, village and cottage and such of the small scale industries which do not require a substantial quantity of investment or money, although the absorptive capacity of such industries in term of per unit credit requirement may not be large, yet aggregate of their credit requirements would be substantial in view of the large number of such industries. Apart from their employment potential, such industries also help increase production for domestic markets and create market linkages in Bihar and Punjab.
In the end, credit deposit ratio can sometimes be a misleading parameter to measure the growth of the country. Sometimes, a region having low CD ratio can have very high growth level e.g. Kerala, where the state has prospered in spite of low CD ratio (due to large deposit amount from NRIs). Also, the credit deposit ratio does not give information about the credit risk i.e. the information about the non performing assets of the bank. In some regions, banks have poor credit history where people do not pay back their loans and regularly default, so, in these cases banks are reluctant to give out credit to people and that is not shown by CD ratio. Credit deposit ratio does not give information about the usage of credit, whether, it is being used for productive purpose or not.
So, credit deposit ratio is only an indicator and not a true parameter (or yardstick), to measure the economic growth of the country.
