The Hindu Business Line : A seedy ratio

For very long, Kerala's bankers have been regularly chided by successive State Governments for the low credit-deposit (CD) ratio, that the State reports. Thus in October 2002, Mr A.K. Antony, the then Chief Minister, said: "The functioning of the nationalised banks, which mobilised huge deposits from Kerala, was neither beneficial to the State Government nor to the development of the State. What is the use of such banks, which mobilised deposits only to lend them elsewhere? Their attitude is totally against their basic objectives.''

That remark typically reflected the criticism that has come from other persons, notably economists like the late I.S. Gulati, former Chairman of the State Planning Board. The essence of the criticism is that banks are being overly conservative in Kerala, and are not lending enough, especially for industrial activities.

Thus it was heartening to learn last week that the State Level Bankers' Committee (SLBC) had announced after its quarterly meeting that the CD ratio of banks in the State has improved by 7.12 percentage points during the first nine months of 2005-06.

According to the bankers, the latest figures indicate a robust absorption of credit by various sectors of the Kerala's economy. But is that really the case? Consider the case of a bank in one of the poorest countries of the world, Bangladesh.

The Janata Bank, a nationalised commercial bank established under the Bangladesh Banks (Nationalisation) Order 1972, reported a CD ratio of 77.95% in 2000. Kerala's CD ratio then was just around 18 per cent.

To understand the implications of the CD ratio, perhaps it is necessary to get some basics right. The CD ratio is a product of the ratio of number of credit accounts to deposit accounts and the ratio of credit amount per account to deposit amount per account.

Statistician D. Narayana, Fellow at the Centre for Development Studies, Thiruvananthapuram, provides this expanded explanation: "The credit-deposit ratio may be written as, (number of credit accounts X average credit amount per account) divided by (number of deposit accounts X average deposit amount per account)."

In his study, Mr Narayana found that Kerala reports very low amounts per credit account in almost all sub-sectors of industry, and a very high concentration of credit in food manufacturing and processing, other industries and construction.

Kerala has one of the lowest amounts per credit account in industry among all the States in India and the amount per small-scale industry account is 73 per cent of it.

Mr Narayana concluded that, whether officially classified as small-scale industry (SSI) or not, the average industrial account in Kerala is of the size of the SSI account.

So even as the SLBC gloats over the fact that the State's CD ratio is looking healthier, other figures indicate the reason for this may lie elsewhere.

The total deposits with the commercial banking system in Kerala reached Rs 72,877 crore on December 31, 2005. Of this, the non-resident external (NRE) contribution accounted for Rs 29,641 crore. These remittances from Kerala's emigrant workers continue to prop up the State's economy.

Why is the exposure to industry, trade and finance with larger size and hence smaller number of accounts, so low in Kerala, asks Mr Narayana. Within industry the size of loans seem to be extremely small - smaller than small-scale industry - again entailing high cost of servicing accounts.

The size of deposit accounts also do not suggest that it is attractive for the banks to do business in Kerala because the amount per deposit account is just about the same as the all-India average, he notes.

Mr Narayana concludes that "the facts of the case do not seem to suggest a negative attitude of banks.

The small size of economic activity seems to suggest that there is something in the air in Kerala which does not allow them to grow and the size of banks' lending and the consequent credit-deposit ratio only mirrors that reality and probably is not a causative factor."

The writer can be contacted at kgkumar@gmail.com

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