Opinion

A segmented banking system can boost credit

K Srinivasa Rao | Updated on July 21, 2021

Driving Credit growth   -  istock.com/

Big banks can lend to big ticket customers such as corporates, while smaller entities can focus on the retail segment

Despite ample liquidity provided by the RBI under the multipurpose Targeted Long Term Repo Operations (TLTRO), there is no perceptible improvement in the credit growth. Credit growth dipped to 5.8 per cent in FY21 as against 6.14 per cent in FY20, a 58-year-low, according to an SBI Research analysis.

But the recent ‘Coalition Greenwich Report’ — a Division of Crisil brings some cheer. It says that big banks are gaining better share in corporate lending. SBI, ICICI Bank and HDFC Bank have emerged as ‘2021 Greenwich Share Leaders’ while Axis Bank was the ‘2021 Greenwich Quality Leader’.

The report further observes that market penetration of SBI and private banks in corporate banking improved in the last five years. SBI provided credit to 32 per cent of corporates in 2020, up from 30 per cent in 2016. Private banks were providing to 24 per cent in 2020, up from 17 per cent in 2016.

The purpose of merger of banks is to make them big enough to improve their lending capacity. According to Bank for International Settlement (BIS), the credit-to-GDP ratio in India, though marginally improved to 56 per cent in 2020 from 52.4 per cent in 2019, continues to be way behind its peers. It is down from 64.8 per cent in 2015 indicating that banks were unable to align the pace of credit flow with GDP growth.

Low ticket size of loans

The RBI’s ‘Basic Statistical Report – 2020’ shows that out of 272.5 million bank borrowers, only 6,79,034, much less than a million borrowers borrow ₹10 million or more from banks. Bulk of the borrower accounts are small loans of less than ₹10 million. 95.7 per cent of bank borrowers have loan limits up to ₹1 million. Strikingly 77 per cent borrowers have loans below ₹0.5 million.

The lending policies of large commercial banks are yet to align to the size of loans. Obviously, the load of small and tiny borrowers is taking away the bulk of the time of banks and is adding to the intermediation cost and paper work.

Recent adoption of lending automation systems has started de-cluttering the procedure and improving the operational efficiency but there is still a long way to go and more reforms are needed in this area.

Universal lending system

Under the universal banking system we have large banks such as SBI coexisting with small coop banks. There is no defined policy of what kind of borrowers can approach which kind of bank branch. Universal lending policy provides an ecosystem where any kind of borrower can borrow any amount from any bank branch whereas what is needed is to encourage borrowers to approach banks that suit their loan requirements in terms of size of loans. Proximity to a bank branch is the only guiding factor as of now.

A three-tier banking structure is gradually evolving with the recent spate of mergers. Large banks with international presence with asset size exceeding ₹10 trillion are operating in both public private banks.

Regional Rural Banks, Small Finance Banks, Payment Banks, Cooperative banks and Cooperative credit societies present largely in rural areas.

These banks have, over a period of time developed capabilities that can be well harnessed for credit expansion. Even the skill sets for credit appraisal of medium and large loans are different whereas small loans can be template driven. The sheer volume of borrower base can impact the quality of lending, so is the need to handle bad loans of the segment.

Banks providing loans of all sizes may therefore be counterproductive when seen with their specializations and competencies.

It is therefore a time to debate if large commercial banks can focus on loans above ₹1 million while the second set of banks can serve the retail community. The purpose is to improve the quality of growth and create more resources for closer post-sanction monitoring of credit. Big banks can shed low ticket size lending to others and use their resources on developing robust large size credit portfolio.

A high credit-GDP ratio is a key indicator of growth. A higher credit-to-GDP ratio indicates 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 come closer to their Asian peers, a new way of thinking will be needed. The age old practices in bank lending cannot leverage the demographic dividend and serve a growing society. Mining the capacity of banks by allowing them to choose the right size of lending activities aligned to their innate specialised capacity in place of the present ‘one size fits all’ approach can be a possible solution to enhance credit flow.

The writer is former General Manager – Strategic Planning, Bank of Baroda, Mumbai. Views are personal

Published on July 20, 2021

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