R Gandhi: Role of financial sector in the growth of the Southern Region -
a question of balancing
Speech by Mr R Gandhi, Deputy Governor of the Reserve Bank of India, at FINSEC 2014,
2nd Financial Sector Conclave, organised by the Federation of Indian Chambers of
Commerce & Industry (FICCI), Hyderabad, 14 July 2014.
* * *
Assistance provided by Shri S. Arunachalaraman is gratefully acknowledged.
Accompanying tables can be found at the end of the speech.
1. Good Morning Ladies and Gentlemen!
2. The importance and the lead role of financial sector for economic development attracted
the attention of economists, policy makers as well as executors. According to Goldsmith
(1969:400), "mobilizing liquid resource accelerates economic growth and improves economic
performance to the extent that it facilitates the migration of funds to the best user, i.e. to the
place in the economic system where the funds will find the highest social return".
3. In the analysis of financial institutions in Schumpeter's work, banking was considered as
one of the primary and essential factors for economic development. In the whole process of
development, Schumpeter (1933 and 1939) regarded the banking system as one of the two
key agents (the other being entrepreneurship). Given this impetus, it is worth mentioning that
the correlation between bank credit and economic growth is resilient.
4. It is thus the financial system that has been tasked to intermediate to usher in efficient
allocation of resources. Banking system has, in fact, become special with its main functions
of mobilizing savings of public and its efficient allocation for various productive activities and
providing access to those sections of entrepreneurs who are unable to find any formal
financial service. In the Indian context, such allocation of resources for economic activity is
done mainly by banks, but the Regional Rural Banks (RRBs), the Co-operative banks and
the Non-Banking Financial Companies (NBFCs) also contribute in fulfilling this task. In India,
the guidance/directions given to the banking system, with regard to the social banking in the
1970s and 1980s and with the introduction of comprehensive economic and financial sector
reforms in the 1990s helped in addressing the gaps in financing economic activities. Further,
the introduction of financial inclusion and the related policy measures initiated both by the
Government of India and by Reserve Bank of India in recent decade enabled banks to reach
the extra mile and not to distinguish between micro and small enterprises, street vendors,
small business entrepreneurs, etc.
5. India being such a large country that it's different regions are at different states of
economic development and have been growing at different speeds. Public policy does
recognize this and therefore, has provisions that strategies suiting the levels and speeds of
economic growth in the regions be pursued.
6. Today, I will be focusing on the "Role of Financial Sector in the Growth of the Southern
Region". Since banks are the major players in the financial system, my talk will be centred on
the role of banks for economic growth and its future prospects for the region. I have
organized my talk as follows:
(a) I will briefly discuss about major economic parameters of the southern region.
(b) then I will be analyzing the linkage to growth based on (i) Deposits to GSDP (Gross
State Domestic Product) (ii) Banks' Credit to GSDP (Gross State Domestic Product)
(iii) C/D ratio and (iv) Urban Cooperative Banks (UCBs) in the allocation of
resources for economic activities in the region (v) role of NBFCs and (vi) financial
inclusion - general trend in the region.
(c) Thereafter, I will discuss the scope of the banking sector in the emerging
developments of the region and what more can be done by the banks to further the
growth in the region.
Economic growth
7. During the pre - reform period of 1980s, the growth rates of the states in the southern
region were generally less than the all India growth rate. During the 1990s, after the
economic and financial sector reforms, these states performed better than the all-India
growth rate. The growth rates were still higher, during the last 10 years or so when greater
push had been given for financial inclusion. (Pl see Table 1).
Per capita income
8. Let us now look at another indicator of economic prosperity viz., per capita income. The
per capita income of the region over the last three decades compared with other regions
showed that this region has performed very well. In fact, during 1980s, this region's average
per capita income was below the national average. During the 1990s, while Kerala and Tamil
Nadu surpassed the national average, AP and Karnataka were just below the national
average. However, during the 2000s, the entire region was much more than the national
average. (Pl see Table 2)
Banking indicators
Number of offices
9. Let us now turn to the role played by the commercial banks as part of the financial system
for the progress of the region. Commercial banks, which are involved in providing credit
facilities and making investments for productive activities as well as broadening banking
practices under financial inclusion, have expanded their offices across the region. The
number of offices (including Regional Rural Banks) expanded in the region by moving up
sharply from 17,613 end-March 1999 to 29,135 at end-March 2013 (excluding U.Ts of
Pudhucherry and Lakshadweep).
Role of banks
10. I would like to highlight the involvement of commercial banks in the development of the
region. For measuring the role of banks, the following parameters have been considered by
me: (a) deposits to GSDP, (b) credit to GSDP and (c) C/D ratio. The role played by banks
has been analysed under these categories in terms of: (a) prior to the introduction of financial
sector reforms; (b) post financial sector reform period and (c) inclusive growth period. Prior to
1991, the deposit to GSDP of combined Andhra Pradesh in 1981 was hardly 28.0 per cent,
credit to GSDP ratio was 21.1 per cent and Credit to Deposit ratio was 75.3 per cent. This
moved up to an impressive level of 52.8 per cent, 58.1 per cent and 109.9 per cent,
respectively, in 2013, underscoring banking penetration for the growth in the combined State
of Andhra Pradesh (Table 4). In fact, banks have played deeper role, even better in the rest
of the region like Karnataka, Tamil Nadu and Kerala states.
Urban co-operative banks
11. Another important institutional set up in the financial system allocating funds for
economic activities is by Urban Cooperative Banks (UCBs). As at end- March 2014, a total of
557 UCBs under both scheduled and non-scheduled categories were operating in the region.
These UCBs put-together have mobilized public deposits totaling 48,461.41crore as at
endMarch 2014 and funded various activities in the region amounting to 32,146.15 crore at
end-March (Table 5).
Role of NBFCs in the Region
12. As at end-March 2014, there were 995 non-banking financial companies in the category
of deposit taking, non-deposit taking and core investment companies in the Southern Region
as against 12,029 for all-India. Among the states in the region, deposits taking financial
companies are very active in the State of Tamil Nadu (Table Nos. 6 and 7).
13. As regards funding for economic activities, for deposit taking as well as non-deposit
taking companies, lending was high in Tamil Nadu, followed by Kerala and then combined
Andhra Pradesh. They have lent about 1.90 lakh crore as at end of March 2014. (Table 8).
Financial inclusion in the Southern Region
14. In India, even today, we have a huge slice of our populace, comprising mainly less
privileged people that remains largely excluded from the formal financial system. In order to
take the banking service to the so far financially excluded society, constant and special
measures have been taken by the Government of India and the Reserve Bank under the
'Financial Inclusion' programme whereby a roadmap has been set to achieve 100 per cent
Financial Inclusion in the entire country.
15. Accordingly, the Reserve Bank, in January 2006, permitted banks to engage Business
Correspondents (BCs) and Business Facilitators (BFs) as intermediaries for providing
financial and banking services. Reserve Bank has also from time to time enlarged the list of
eligible individuals / entities who can be engaged as BCs. The BC model allows banks to
provide door step delivery of services especially cash in - cash out transactions at a location
much closer to the population, thus addressing the last mile problem.
16. In our efforts to achieve sustained, planned and structured financial inclusion, we have
advised all public and private sector banks to put in place a Board approved Financial
Inclusion Plan (FIP) to achieve the target latest by March 2016. In addition, we have asked
banks to integrate approved FIPs with their business plans and to include the criteria on
financial inclusion as a parameter in the performance evaluation of their staff.
17. As a result, banks have made further stride in providing banking services to the people. I
am happy that commercial banks under 'Financial Inclusion' agenda are moving in tandem
with the target in the entire Southern Region. While the villages under population above 2000
have been covered, the process for ensuring complete coverage of villages with population
below 2,000 is progressing well.
18. As per CRISIL's financial inclusion index called Inclusix, which covers three parameters
of branch penetration, deposit penetration and credit penetration, on a scale of 100, the
highest financial inclusion of 66.1 points has been achieved by the Southern Region in 2012,
as against 42.8 for all-India. This also indicates that more extension and expansion of the
country as a whole, and even in this region.
What more for the region - a balancing act?
19. Let us now discuss what more the banking system can do for the region. There are
several expectations by the region out of the banking system and there are several
compulsions on the banking system. Further, there are certain peculiar specialities in this
region. A standard response by the banking system will be to skip these. In my opinion, the
banking system should, instead, find a fine balance between managing these peculiarities
and adhering to set best practices.
• First of course, is that the region expects continued support from the banks for its
growth lead to be maintained. That is, the region expects to maintain the more than
100% CDR. While the banking system will be willing to be partnering this, it will have
to do so by balancing the expectations from the rest of India. Every region competes
for greater flow of credit and financial services and the banking system has the
responsibility in addressing this.
Second, this region is susceptible to vagaries of nature and natural calamities strike
•
this region in a severe way, affecting especially the agricultural sector. Maintaining
steady flow of credit to the agricultural sector is a challenge. Complicating this is the
ineffectiveness of agricultural insurance. This region has the peculiar, but popular,
habit of gold loans smothering the agricultural loans. In that process, the farmers do
not get the benefits of agricultural insurance. The banking system has to find a
solution for this vexed problem of balancing their need to secure their interests vis a
vis the protection for the farmers. I will return to discuss another variant of this gold
loan related problems in a minute.
• Third, like any other region, this region also wants increased flow of credit for the
Micro, Small and Medium Enterprises (MSME) sector. As is well known, despite
continuous increase in the bank credit for the MSME sector, the formal credit flow
for this sector is very meager compared to the enormous number of units in this
sector and the banking sector should tap the great potentials of this sector. The
biggest hurdles facing the banking system are its requirements of documentation, its
traditional models of assessing the credit needs of the MSMEs and many a time, the
gap in the attitude and sensitivity of the bank officials. It is heartening to note that
the non-banking financial companies (NBFCs) in this region have found a balanced
answer to skirt around these hurdles and their flow to this sector has recorded good
growth in recent times. Perhaps, the banking sector can also find such a balance.
• Fourth, another speciality of this region is the preponderance of non-formal and
informal, but riskier avenues for savings. This region is replete with history of the
socalled blade companies, varieties of formal and informal chit funds, ponzi schemes,
emu farms and other types of attractive schemes. These schemes have time and
again captured the imagination of gullible, and even not-so-gullible people of this
region, very often lured them into losing their hard earned savings. These ever
running episodes only clearly establish the failure of the formal financial system,
including the banking system, in catering to the savings, investment and risk taking
needs and appetite of these masses. They very pithily indicate that there are
savings to be mobilised in an orderly manner; and there are people whose risk
appetite is more than ordinary or normal and the formal financial system can offer
them well regulated risky financial products. The banking system should come out
with innovative and customized savings and financial products. This way they can
balance their business opportunities with the niche needs of these people in the
region.
• Fifth, another speciality of this region is very note worthy and heartening. That
relates to the number of Self Help Groups (SHGs), especially of the women which
operate in this region. In fact, the southern region leads by leaps and bounds in this
respect. The readiness, the enthusiasm and the dedication and discipline of these
women SHGs are the backbones of their success. In the wake of their successes,
certain unhealthy practices and certain overreactions to them had resulted in a
slowdown, even in stoppage of credit flow to this segment. Further, quite many
SHGs, before they have matured enough to handle credit and finance, have been
exposed to credit. Concomitantly, the credit discipline that had been assiduously
built painstakingly over the years has been ruptured. Restoring that spirit, while
ensuring continued flow of credit is another balance the banking system has to find.
Conclusion
20. Now, to conclude, we have seen how the regional economy did a turnaround in the post
reform and financial inclusion period as compared to the pre-reform period; the regional
economy has not only posted better growth but also has surpassed certain all-India numbers.
We also saw how the banking system has, by allocating the mobilised resources, contributed
to the steady and sustained economic growth of the region over the last three decades. We
have also seen the role played by the urban cooperative banks and the non - banking
financial companies in providing access to financial products and services and helping in
allocation of credit. Finally, we discussed some peculiarities and specialities of the region
and their impact on the banking operations and how banks need to undertake a tightrope
balancing while handling these peculiarities.
21. Thank you one and all for your kind attention.
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