The Hindu Business Line : Small borrowings boost per capita income

The misdirected ‘priority sector’ credit might have played a role in boosting the share of small accounts in poor States, with the actual funds not being used to boost incomes either

A. Srinivas

Bangalore, June 23 States with a relatively high per capita income have done better at reaching out to the small borrower.

While small borrowal accounts in the country as a whole account for 90.4 per cent of all accounts but only 16.4 per cent of gross bank credit, the proportion on both counts is more in most better-off States.

However, Maharashtra, Delhi and Tamil Nadu are major exceptions to this trend.

These trends emerge from data in the Reserve Bank’s Survey of Small Borrowal Accounts, 2006. Since most of the lending to small borrowers comes under the priority sector, it would appear that priority sector lending has led to more income generation in the well-off States than in others. Small borrowers also account for a considerable share of outstandings in some of the poorest States as well.

The misdirected ‘priority sector’ credit might have played a role in boosting the share of small accounts in poor States, with the actual funds not being used to boost incomes either. The scarcity of capital in these regions and the lack of large borrowings might have helped raise the share of small loans.

Bihar, India’s poorest state, leads the way in representation of small borrowers in the banking network. Small borrowers’ accounts in the State constitute 96 per cent of all accounts and 57 per cent of all bank credit. This trend extends to Jharkhand, Assam and Orissa. The share of small borrowers in gross bank credit in these States is 38 per cent, 42 per cent and 42 per cent, respectively. If the share of small borrowers in the banking system is high in low income States, it is also perhaps because capital is scarce in these regions.

The correlation between the share of small borrowings in bank credit on the one hand and poverty levels on the other is not as significant as the former’s correlation with per capita income. This shows that the really needy are still out of the banking network. With small loan accounts falling as a proportion of all accounts since 1999, the relationship between banking and poverty alleviation may further weaken, even as sectors such as housing benefit from the ‘financial inclusion’ drive.

Kerala, Himachal Pradesh, Haryana and Punjab — States with a per capita NSDP rank in 2004-05 of 10, nine, five and seven — have a higher share of small borrowings in total outstandings than the average. Their poverty ratios are 11.4 per cent, 6.7 per cent, 9.9 per cent and 5.2 per cent, respectively. Maharashtra and Delhi, ranked six and four, in per capita NSDP, are outliers, with small borrowings accounting for 5.8 per cent and 3.8 per cent of total outstandings, respectively. This shows Maharashtra in poor light; with a poverty ratio of 25.2 per cent in 2004-05, more than the all-India level of 22 per cent, it appears that the poor in the State have been left out of the banking network.

Banks in Maharashtra seem to favour large borrowers, as small borrowers account for just 78 per cent of all accounts, the lowest in the country after Delhi. Delhi, by virtue of being the Capital, is non-comparable with other States. It has a poverty level of 10 per cent, thanks to the infusion of development funds over the years.

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