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CHAPTERVIII

CREDIT DEPOSIT RATIO AND PRIORITYSECTOR LENDING

8,l Introduction

The flow of credit is one o f the key instruments to regulate variouseconomic activities. The credit is deployed by commercial banks based on the depositsmobilised from the public after making allowances for statutory requirements prescribedby RBI from time to time. In order to maximise the credit flow and to ensure betterdeployment of credit, a monetary tool known as Credit Deposit Ratio (CDR) wasintroduced by RBI. The CDR has become more important after the nationalisation ofbanks to assess the credit deployment by commercial banks to benefit the economy ingeneral and the targeted group in particular. Tk DR expressed in terms of percentagereflects the trends of the flow of credit during each period. Priority Sector Lending(PSL) normally depends on the CCDR, that is, higher the CDR, higher will be the flowtowards the PSL. The flow towards PSL is decided by the flow of net bank credit whichin turn depends on CDR. As per the RBI stipulation, atleast 60 per cent of the CDRshould be achieved by Commercial banks with 40 per cent of the net bank credit topriority sector. The quantum deployment o f PSL in turn depends on the net bank creditwhich in turn depends upon the CDR. This chapter attempts to analyse the vitalrelationship betweenCDR nd PSL in the context of Union Territory of Pondicheny.

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8.2 Growth of Deposits and Advances - AH IndiaOver the years, deposits and advances have gown' enormously in India.

For i~~stance etween June, 1969 to March 1998, the deposits have grown fromRs.4.646 to 6,05,410 crores in 1998 implying an increase of 130.30 times. The creditdisbursed has increased from Rs.3599 crores to Rs.3.24,079 crores for the correspondingperiod, indicating an increase of 90.04 times. However, CDR which was 77.5 per centin 1969 has come down to 53.5 per cent in March'98. The growth of deposits to theextent of 130.30 times and growth of advance to the extent of 90.04 times indicate thereduced credit flow from banks which widens the gap between the deployment of creditand mobilisation of deposits. When the CDR is at a lower ebb, the weaker sections willbe the most affected along with other borrowers. The proportion of bank deposit forms avery higher percentage to total money in circulation. Hence, it is of paramountimportance to ensure the flow of adequate credit. After the financial sector reformmeasures were introduced in 1991, there was decline in CDR from 60.8 per cent inMarch'90 to 60.6 per cent in March'91 and further down to 55.4 per cent in March592.The CDR was of 55.1 per cent in March'97 and further down to 53.5 per cent inMarch' 98 which is well below the stipulated target of 60 per cent..

8.3 Credit Deposit Ratio in the Union Territory of Pondicherry

In the Union Territory of Pondicheny, the CDR mechanism was operatingwell even before bank nationalisation in July 1969. An analysis of deposits and

'~eserve & of Mia.,Mumbai - BankingStatistics - Basic Statistical ReturnsVolume .25, March, 1996,

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advances made between 1962-1968 show that the deposits had gone up from Rs.250lakh to Rs.501 lakhs and the corresponding flow of advances were Rs.207 lakhs andRs.327 lakhs respectively. Between 1962 and 1968. the CDR had never come downbelow 60 per cent. The bank nationalisation has facilitated the opening of more numberof bank branches in various nook and comers of the Union Territory of Pondicherry,thereby making available the banking facilities at the door step of the common man. Asagainst 15,000 population per bank branch in 1969, it was 11.000 population per bankbranch in 1996. The deposits mobilised, credit advanced and the CDR from 1969 aregiven in Table 8.1.

As may be seen from Table 8.1, bank deposits on the aftermath of banknationalisation, has gone up from a mere Rs.552 lakhs in 1969 to Rs.96,661 lakhs inMarch, 98 indicating an increase of 175.11 times. The credit flow for the same periodhas gone up from Rs.480 lakhs to Rs.34,733 lakhs indicating an increase of 72.36 times.From this analysis, it can be inferred that though the deposits mobilised and advancesmade during the last 29 years had gone up, the percentage increase in the growth ofdeposits and advances was not at the same rate. This clearly brings out the fact that thereis a widening gap between the growth of deposits and advances in the Union Territory ofPondicheny. Due to this gap, the deployment of credit was affected in the UnionTerritory of Pondicherry. The credit deployment had exceeded in 1970 and 1971indicating CDR of 104.52 per cent and 100.30 per cent respectively. CDR had nevercome down to less than 60 per cent till 1982 ( except the year 1980 ). From 1983, CDRstarted declining gradually. The CDR had come down to 43.58 per cent in 1986.

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Table 8.1: CREDIT DEPOSIT RATIO IN THE UNION TERRITORY OFPONDICHEKRY

(Rs, in Eakhs)S1. No. Year Deposits Advances Credit Deposit

Ratio in(3) (4) (Percentage)( 5 )

Source: [a] Reserve Bank of India, bank in^ Statistics 1972 - 1995 - Basic Stat~sticalReturns,Mumbai, PP 99-122[b] Reserve Bank of India, Statistical Tables relatine to Banks in India 1996 - 97,Mumbai pp 48 - 62.[c] Reserve Bank of India, Banking Statistics -Basic Statistical Returns (Vol-26) March 1997,

Murnbai, pp26-36.[dl ReserveBank of India, Bankine.Statistics-OmiterlvHandouts,Various Years, Mumbai[el Planning and Research Deparbnent, Government of Pondicherry, Bankine Indicators,

Pondicherry, May 1990.[ f l Lead Bask (Indian Bank) Qiitdct Credit Plan / Annual Credit Plan 1980 - 1997-98Union Tenitom of Pondicherrv,

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During 1987 and 1990. the CDR was fluctuating between 50.88 to 55.73 per cent andthereafter a steady decelaration has started culminating in an all time low CDR of 39.01

per cent in March 1997 and and 35.93 in March 1998. The CDR has all along beenmaintained at the level of more than 50 per cent t ~ l lMarch, 90 (except in 1986). whereasthe ratio has come down below 50 per cent, after the structural reforms are introduced inthe financial sector in 1991. This has affected the credit flow.

It may not be out of context to mention that in the Regional ConsultativeCommittee (RCC) meeting of nationalised banks for southern region held in June, 1993at Bangalore, the issue of low CDR pertaining to the Union Territory of Pondichenywas discussed and a decision was taken to appoint a committee2 o go into the problems.This committee has projected a CDR of 65 per cent to be achieved by March, 1997.This has not been achieved till date . Though the decline in CDR was an All Ind~aphenomenon affecting various States, the decline was more steep in the Union Territoryof Pondicherry.

8.4 Sectoral Flow of Credit Under Priority Sector Lending (All India)

From the sectoral flow of credit under PSL for All India as indicated inTable 8.2 it can be seen that in 1970, Agriculture sector had received 39.88 per cent ofpriority sector credit and this has gone up to a maximum of 43.1 1 in 1981. Till 1990, the

'Indian Bank ( Lead Bank ), Pondi~hqw Report of the committee on CreditD l R a t i onct 1994, Madras, pp.53-55,

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Table 8.2: SECTORALLOWOF CREDIT TOWARDS PRIORITY SECTOR LENDING - ALLINDIA(Rs. in Crores

Other TotalSI. No Year Agriculture Percentage Priority Percentage Priorityto ~01.9 Sedor to co1.9 Sector to co1.9 Sector

Lending Lend~ng(1) (2) (3) (4) (5 ) ( 6 ) (7) (8 ) ( 9 )

Source:[a] Reserve Bank of India - Report on Currency and Finance, 1969-70 - 1988-89 and AnnualReports of Reserve Bank of India, various years,Mumbai.[b] Reserve Bank of Ind~a,Banking Statistics I972 - 1995 - Basic Statistical Returns,Mumbai,[c] Reserve Bank of India, Statistical Tabla relating to Banks in India 1996 - 97,Mumbai.[dl Reserve Bank of India, Baking Statistics- Basic Statistical Returns, Vol-26 March 1997,Mumbai .[el ReserveBank of India, BankioeStatistics -Ouarterl~ andouts various years, Mumbai

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flow ranged from 41 to 43 per cent of total priority sector credit, when the financialsector reforms were pervading the commercial banks, downward trend has started from

1994 onwards. By March 1998 the credit flow towards agriculture sector was only 35.04per cent. In the case of small industries. the flow was 46.76 per cent in 1970. Flow wasbelow 40 per cent from 1978 to 1990. Thereafter it has picked up and had reached alevel of 43.72 per cent in March,1998. As regards other priority sectors (services sector)it was 13.36 per cent in 1970 and increased to 19.43 per cent in 1980. 20.56 per cent in1990 and 21.23 per cent in 1998.

8.5 Inter sectoral Flow of Credit out of Net Bank Credit

Table 8.3 indicates that there was a steady percentage increase of Netbank credit towards agricultural sector from 1970 till 1987. The deceleration inpercentage flow has started from 1988 and continued till MarchJ998. The financialsector reform has accentuated the process of downward trend. As against 18 per centflow of net bank credit towards agriculture, it was only 11.73 per cent in 1998. Smallscale industries did not face much problem as that of agriculture sector. From 10.53percentage in 1970, it was 14.64 per cent in 1998. Other PSL indicates that from 3.01per cent in 1970, the flowhas increased to 9.67 per cent in 1987. In 1998, the flow was7,11per cent only.

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TABLE .3: SECTORALLOWOF CREDIT OUT OF NET BANKCREDIT ALL NDIA(Rs ~n Crores)

OtherSI.No. yep,. Agriculture Percentage Small Scale Percentage Priority Percentage Net Bankto co1.9 Sect-or to col .9 Sector to co1.9 CreditLendrng

(1) (2) (3) (4) (5) ( 6 ) (7) (8) (9)

Source: [a] Reserve Bank of India - Report on Currency and Fmance, 1969-70 - 1988-89 and AnnualReports of Reserve Bank of India, various years,Mumbai.[b] Reserve Bank of India, Banking Statist~cs1972 - 1995 - Basic Stattstical Returns,Mumbsu,[c] Reserve Bank of India, Statstical Tables relatinP to Banks in India 1996 - 97,Murnbal.[dl Reserve Bank of India -B&P Statistics- Basic Statutical ReturnsAVol.26 March 1997,Murnba .[el ReserveBank of Wa,Banking Statisbcs-Ouarterly Handouts various years, Mumbal

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8.6 Trends in Priority Sector Lending in th e Union Territory of Pondieherry

The advances of scheduled commercial banks towards PSL in the UnionTemtory of Pondicherry are available only from 1972. The advances of Commercialbanks under various broad sectors of priority sector are indicated in Table 8.4.

Table 8 4 indicates that agricultural sector had received 5 1.Q per cent ofpriority sector credlt from 1972 and increased to a maximum of 6 5 63 per cent in 1982Downward trend has started since then. In 1991: the flow was only 43.09 per cent andthis has come down to 38.28 per cent in 1994 In 1997, it was 45 42 per cent. In respectof small scale sector, the flow was 45.17 per cent in 1972. The sectoral flow had startedits decline since 1973 year by year. During 1982, the percentage was 27.54. Dunng thenineties, the flow has started increasing with 42.38 per cent in 1992 and 41.52 per cent in1994. Thereafter, decline has started reaching a low of 33.67 per cent in 1997. Asregards other priority sector, it may be seen that from a mere 3.88 per cent in 1972 it hasreached a maximum of 7.47 per cent in 1981. In 1983, the flow was 15.34per cent whlchincreased to19.51 per cent in 1984 . The percentage flow was hovering around aminimum of 16 per cent to a maximum of 18.52 till 1991. From 1993, the percentageflow was in the vicinity of 20 to 21 per cent. In 1997,the percentage flow was 20.90.

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Table 8.4: SECTORAL FLOW OF ADVANCES FROM COMMERCIAL BANKSUNDER PRIORITY SECTOR LENDING, PONDICHERRY

$1- ye,, Agriculture Percentage Small Scale Percentage Other PercentageTatal

No to c01.(9) Sector to co1.(9) PrioritySector '0 ~0149) Seetor

Source: [a] Reserve Bank af India, Banking Statistics 1972 - 1995 - Basic Stattstical Returns,Mumbai, PP 99-122[b] Reserve Bank of India, Statistical Tables relating to Banks in India 1996 - 97,Mumbal pp 48 - 62.[c] Reserve Bank of India, l V 0 1 . 2 6 , arch 1997,Mwnbai, pp26-36.[dl Reserve Bank of India, B d h p Statistics-Quarterly Handouts, Various Years, Mumba~[el Planning and Research Deparbnmt, Governmentof Parrdicheny, Banking; Indicators,- ~ondicherry,May 1990.[fl Lead Bank (Indian Bank) District Credit Plan / Gnnual Credit Plan 1980 - 1997-98Union Te;rritory of Pondicherrv.

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8.7 Sectoral Flow of Advances Out of Net Bank Credit in the Union Territory ofPondicherry

The sectoral flow of advances out of the net bank credit in the UnionTerritory of Pondicherry from 1972 to 1997 is given in Table 8.5. The flow had beenincreasing steadily from year to year (except in 1977 and 1979) from a mere 10.41 percent in 1972 to a maximum of 34.17 per cent in 1983. Thereafter there was decline in1984. In 1985 and 1986, flow towards agricultural sector had picked up. Since 1987.the decline has started and had come to a low level of 17.02 per cent in March.92. From1991 to 1997, the percentage flow was in the range of 15 per cent to 17 per cent only. Inthe case of small scale sector from a mere 9.22 per cent in 1972, the flow has gone upand reached a maximum of 20.70 per cent in 1980 and 22.74 per cent in 1983. From1984 to 1990, the credit flow was between 13 per cent and 19 per cent. In March, 1997it was only 12.07 per cent. The percentage of credit advanced under other priority sectorwas a mere 0.79 in 1972 and increased to a maximum af 3.82 in 1980. During 1983, theflow was 10.31 per cent. This trend was almost maintained till 1986. From 1987 to1997, the flow had been hovering around 6.97 per cent to 8.76 per cent.

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Table 8.5: SECTORAL FLOW OF ADVANCES OUT OF THE NET BANKCREDIT OF COMMERCIAL BANKS, PONDICHERRY

s,.No Year Agriculture Percentage Small Scale Percentage Other NetPercentaget o co1.(9) Sector to CO!.(Y) Bankto Co1.(9) Credit

26 1997 5278 I8 1628 3912 94 12 07 2429 03 749 32421Source: [a] Reserve Bank of India, Banking Statist~cs 1972 - 1995 - Basic Statistical Returns,Mumbai, PP 99-122

[b] Reserve Bank of India, Stat~stical Tables relating to Banks in India 1996 - 97,Mumbai pp 48 - 62.[cl Reserve Bank of India, Bankinrr Statistics-Basic Statistical Retuns. Vol.26, March 1997,- Mumbai, pp26-36.(dl Reserve Bank of India, Banking Statistics- QuMerlv Handouts, Various Years, Mumbal[el Planning and Research Departmat, Government of Pondicheny, Bankine Indicators,?ondichem, May 1990%[ f l Lead Baak (Indian Bank) District W i t P1.m 1 Annual Credit Plan 1980 -1997-98Union T e n i f P o ~ d i c h m ~

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8.8 Recovery Performance of Banks in the Union Territory of Pondicherry

Recovery is a major problem encountered by commercial banks ingeneral. After the structural reforms are implemented in financial sector, particularly inbanks, a new dimension has been added and the advancing of fkthe r credit is linked torecovery of performance of banks. The prudential norms has driven the banks to a tightcorner. The performance of banks in terms of profitability depends on the recoveryperformance. In this context, it was attempted to find out the of recovery performancemade by commercial banks in the Union Territoryof Pondicherry.

Table 8.6: RECOVERY PERFORMANCE UNDER PRIORITY SECTORADVANCES,PONDICHERRYYear Recovery

(in Per Cent)

Source: Indian Bank (Lead Bank), - h u a l Credit Plans and Agenda Pagers of the StateLevel Bankers' Committee, Pondicheny, Various Years, Pondicherry.

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From Table 8.6. it may be seen that the recovery performance of banksunder PSL in 1987 was 38.27 per cent. This performance has improved to 53.97 per centin 1991 and 56.02 per cent in 1992. It has come down to 48.86 per cent during 1993.Improvement has taken place in 1994 to 58 per cent. In 1995 and 1996 it was 53 percent and 60 per cent respectively. During 1997 it has come down to 54 per cent and to55.21 in 1998. This shows that the recovery position of advances is not as alarming as itwas portrayed by various commercial banks in the Union Territory of Pondicherry Thesector-wise recovery performance under priority sector from 1995 is given in Table 8.7:

Table 8.7: RECOVERY PERFORMANCE (SECTOR-WISE), PONDICHERRY(in Per Cent)

SI.No. Name of the Sector 1995 1996 1997 1998(1) (2) (3) 14) (5) (6 )1. Primary 65 64 64 632. Secondary 41 53 4 1 483. Tertiary (Services) 42 60 48 50

TOTAL 53 60 54 55Source: Indian Bank (Lead Bank), Agenda papers of the 58" meeting of State LevelBankers' Committee, Pondicherry, 1999.

It can be seen from Table 8.7, that as against the overall recoveryperformance of 53 per cent in 1995, it was 55 per cent in 1998. Agriculture and alliedactivities throughout 1995-98 has witnessed a recovery performance of more than 60 percent. Though little less than half of the loans were recovered under industries sector,more efforts are required on the part of banks and concerned implementing agencies togo in for all out efforts to recover the amount and try to achieve a recovery performanceof 90 per cent if not 100 per cent. Similar is the position in respect of services sector.Now joint recovery camp is attempted by commercial banks in coordination with theconcerned implementing agencies like DIC, DRDA and PADCO which may likely toyield a positive impact in the recovery fkont.