3.1 During the year 2003-04, the strong macroeconomic environment and supporting monetary and financial policies had a favourable impact on business growth and financial performance of commercial banks. The balance sheets of banks witnessed further strengthening due to the robust growth of deposits on the liabilities’ side accompanied by strong growth of loans and advances, and investment on the assets side. The record growth in bank credit in the priority sector including agriculture, small industries and other sectors including housing, and also in non-priority sectors including the consumer credit reflected an improvement in access to credit. There was a significant improvement in the asset quality and profitability of commercial banks with a continuing focus on integrated risk management systems to monitor credit, market and operational risks, recovery management and corporate governance practices. The capital to risk-weighted assets ratio (CRAR) showed further improvements across various banks. A notable achievement was that despite the switch over to the 90-day delinquency norm with effect from March 2004, gross non-performing assets declined in absolute terms for a second year in succession. Despite sluggish income growth consequent upon the lower interest rates prevailing, the momentum of the high growth of profits witnessed in recent years was sustained during 2003-04 mainly driven by the substantial increase in non-interest income and a significant containment in the overall expenditure, primarily, interest expenditure (Table III.1).

2. Assets and Liabilities of Scheduled Commercial Banks¹

3.2 The size of the balance sheet of scheduled commercial banks (SCBs) recorded stronger growth during 2003-04; the growth rate of aggregate assets at 16.2 per cent was higher by nearly 6 percentage points over the growth of 2002-03. The ratio of assets of SCBs to GDP at factor cost at current price increased to 71 per cent, an increase of 2.5 percentage points over 2002-03, implying further deepening of the financial sector. On the liabilities side, deposits continued to account for about four-fifths of banks’ total liabilities. On the assets side, the shares of two major components, i.e., loans and advances, and investment, in total assets of SCBs remained more or less similar to the position recorded in 2002-03 (Table III.2). The share of loans and advances in the balance sheet

1 The assets and liabilities of scheduled commercial banks are analysed primarily on the basis of end-March audited annual accounts. During 2003-04 one private sector bank, viz., Development Credit Bank shifted from old private sector bank to new private sector banks, with statistical implications for the balance sheet and financial performance of new private sector banks and the old private sector banks.

of SCBs increased marginally accompanied by an increase in the share of term loans. The share of investments in total assets of SCBs declined, albeit, marginally, while there was an increase in the share of investment in Government securities. The share of investment in non-approved securities witnessed a decline reflecting the stringent norms imposed on non-SLR investments. The investment component of the balance sheet grew at 15.6 per cent during 2003-04, lower by 2.5 percentage points when compared with the record growth of the year 2002-03.

3.3 Among bank groups, public sector banks (PSBs) continued to account for the major component of balance sheet of SCBs though their market share in deposits, advances, and investments was somewhat contained and that of private sector banks increased during 2003-04 (Table III.3). Bank-groupwise consolidated balance sheets are provided in Appendix Tables III.1.(A) to III.1(C). All bank groups witnessed double-digit asset growth (Table III.4).

3.4 The trends in major banking aggregates of SCBs indicated a stronger growth of deposits, robust growth of credit particularly non-food credit, and a continued growth in investments during 2003-04 (Table III.5).

2 This sub-section is based on the statutory returns submitted by scheduled commercial banks under Section 42 (2) of the Reserve Bank of India Act, 1934.

3.5 Aggregate deposits of SCBs increased by 17.5 per cent in 2003-04, which was higher than the growth rate of 13.4 per cent (adjusted for the merger effect) recorded in 2002-03 (Appendix Table III.2). The greater requirement for transaction balances due to buoyant economic conditions, growth of non-food credit during the later part of the year and various other developments in financial markets pertaining inter alia, to developments in mutual funds segment and increased activity in capital market including disinvestments and FII inflows, had induced a high growth of demand deposits during 2003-04. Demand deposits of SCBs increased substantially by 32.1 per cent during the year as against an increase of 11.3 per cent in 2002-03, while time deposits grew by 15.2 per cent during 2003-04 compared with 13.7 per cent growth rate (adjusted for merger effect) in 2002-03 (Chart III.1).

3.6 Across bank groups, the expansion of deposits in 2003-04 was highest at 29.6 per cent for private sector banks followed by 15.4 per cent for PSBs, and 15.1 per cent for foreign banks. The rate of expansion in demand and saving deposits was highest for private sector banks followed by foreign banks and PSBs. Regarding term deposits too, the private sector banks recorded the highest growth followed by the PSBs. For foreign banks, however, there was a decline in the growth of term deposits due to payouts of maturing deposits.

3.7 Bank credit recorded robust growth during 2003-04 amidst the contraction in food credit owing to lower procurement and higher off-take and a sustained growth of non-food credit due to the turnaround in the macroeconomic environment and increase in foreign currency credit demand reflecting relatively lower cost of funds vis-à-vis Rupee loans. The initial sluggishness in non-food credit demand during the year was reversed by an upsurge from mid-August 2003, backed mainly by growth of priority sector loans, housing, retail and industrial credit. Gross bank credit increased by 15.3 per cent during 2003-04 compared with an increase of 16.1 per cent (net of merger effect) recorded in 2002-03. The growth of bank credit was supported by sustained increase in non-food credit, which increased by 18.4 per cent during 2003-04, almost similar to the growth rate of 18.6 per cent (adjusted for the merger effect) recorded in 2002-03.

3.8 In 2003-04, the balance sheet of SCBs showed that term loans accounted for a major share of 79 per cent of increase in outstanding loans and advances. The improvement in asset-liability management was evident from the fact that the expansion in term loans accounted for about 90 per cent of expansion in term-deposits.

3.9 Credit to agriculture and rural sector has been accorded top priority in the Common Minimum Programme of the Government of India. In the Budget 2004-05, Government of India has announced that the flow of credit to agriculture should be doubled in three years. Accordingly, all banks have been advised to step up agricultural credit. In 2003-04, the sectoral deployment of credit was associated with some positive developments. The growth of non-food credit was mainly driven by loans to priority sector, housing and infrastructure (Table III.6, Appendix Table III.3).

3.10 The credit flow to the priority sector from select SCBs (which account for about 90 per cent of gross bank credit) increased by 24.7 per cent, which was higher by about 8 percentage points over the growth rate (adjusted for merger effect) recorded in 2002-03. On an incremental basis, the flow of credit to priority sector accounted for about 55 per cent of the variation in net bank credit during the year, higher by about 20 percentage points when compared with 2002-03. During 2003-04, the growth of credit to the priority sector has been driven by the increase in lending to agriculture sector, small scale industries (SSI) and the other priority sector. The flow of credit to agriculture increased substantially by 23 per cent in 2003-04 as against an increase of 18 per cent in 2002-03. Bank credit to SSI also increased sharply by 9 per cent in 2003-04 as against an increase of 6 per cent in 2002-03. The spurt in other priority sector lending could be attributed to inclusion of investment made by banks in the mortgage backed securities (MBS) under direct lending to housing within the priority sector and the increase in the ceiling for lending for housing to Rs.10 lakhs in rural area. Anecdotal evidence suggests increases in credit lines to small transport operators.

3.11 The flow of credit to medium and large industries recorded lower growth during 2003-04 as compared with 2002-03. Industrial credit decelerated due to greater dependence of large corporates on internal sources as well as alternative sources of external financing. Credit to infrastructure sector, however, increased by 41.6 per cent in 2003-04 on top of a 35.3 per cent increase in 2002-03. Banks’ lending to wholesale trade posted a robust growth during the year. Banks’ lending to non-bank financial companies showed a decline in 2003-04. The flow of credit to various other sectors including retail loans recorded stronger growth of 23.7 per cent during

2003-04 as compared to growth rate of 11.5 per cent recorded in 2002-03. Thus, retail banking, mainly, in the form of housing and personal loans attracted an increasing share of banks’ loan portfolio.

3.12 Fiscal 2003-04 witnessed an increase in the share of housing loans in non-food gross bank credit to 7.1 per cent in March 2004, higher by a percentage point from 2002-03. Although the growth rate of housing loans at 42 per cent for 2003-04 was substantially high, it was lower by 13 percentage points compared with the growth rate of 55 per cent recorded in 2002-03 (Box III.1).

3.13 The retail banking portfolio encompasses deposit and asset linked products as well as other financial services offered to individuals for a variety of personal consumption and investment purposes. Retail banking is increasingly viewed

Céline G. L., and Erlend N., (2004), ‘The Economics of Retail Banking—An Empirical Analysis of the UK Market for Personal Current Accounts’, Financial Stability Report, 2004, Bank of England, European Credit Research Institute (2000) ‘Consumer Credit in the European Union’ ECRI Research Report No. 1 February.

Morris, J., (2001), ‘Risk Diversification in Credit Portfolio, An Overview of Country Practices’, IMF Working Paper No. 01/ 200 Stefanie K., and Harald S., (2002), ‘Consumer Credit Rates in the Eurozone: Evidence on the Emergence of a Single Retail Banking Market’, ECRI Research Report No. 2, January. Wendy E., (2004), ‘Testing for Adverse Selection and Moral Hazard in Consumer Loan Markets’, Federal Reserve Board, February 10.

Wightman, J., (1980), ‘Consumer Lending’, The Canadian Banker & ICB Review, Toronto, August, Vol.87, Issue 4; p. 28

3 Also see Chapter II: Box II.17.

3.14 The typical products offered in the retail banking segment are housing loans, consumption loans for purchase of durables, auto loans, credit cards and educational loans. The loans are marketed under attractive brand names to differentiate the products offered by banks. The loan values typically range between Rs.20,000 to Rs.100 lakh. The loans are generally for duration of five to seven years with housing loans granted for a longer duration of 15 years. Credit cards is another rapidly growing sub segment of this product group.

3.15 An important characteristic of retail banking assets is the comparatively low loan values. In order to appraise such loans, banks are using more refined credit assessment methods. These include credit scoring techniques, automated application processing, behavioral scoring models and income surrogate models (Box III.3). In addition, banks are also using data sharing as a means of improving the selection of customers and reduction of credit losses. In the absence of full fledged Credit Bureaus, the negative data sharing extends to sharing of data on hot listed credit cards besides using banks’ own internal black lists.

3.16 In 2003-04, export credit grew by 17 per cent as against an increase of 15 per cent in 2002-03. The share of export credit in net-bank credit improved only marginally to 7.6 per cent in 2003-04 as against 7.4 per cent in 2002-03 notwithstanding higher export growth during the year (Chart III.2). The export credit refinance limit showed a declining trend during May-November, 2003 (Appendix Table III.4). The outstanding export credit refinance availed remained negligible during 2003-04.

3.17 In 2003-04, industrial credit expanded by 5.9 per cent, which was lower than 13.6 per cent growth recorded in 2002-03. The credit off-take by the industrial sector remained relatively subdued amidst buoyancy in industrial activity and stronger corporate balance sheet reflecting, inter alia, increased recourse of the corporate sector to internal sources of financing as well as external commercial borrowings. The demand for credit for financing fixed investments remained lower on account of existing excess

The rapid advancement in information technology has enabled banks to adopt various sophisticated tools for processing of information and financial engineering in order to better manage risks of their credit portfolios. Credit scoring is one such technique, which is being increasingly utilised by banks for assessing informationally opaque borrowers. Some cross country evidence shows that over 75 per cent of mortgage lenders and over 90 per cent of credit card lenders in United States use credit scores when making their lending decisions. In developing economies, banks have started using the credit scoring technique in a big way, especially for retail lending including housing loans and credit cards.

A credit score is essentially a statistical number that indicates the level of risk associated with the borrowers. Higher/lower credit score reflects lower/higher level of risks of borrowers. Banks use credit score for risk based pricing strategy, which entails differential interest rates and other lending terms based on the risk profile and creditworthiness of borrowers. Banks and financial institutions use a variety of credit scoring models for analysis of borrowers’ creditworthiness. Credit Reporting Agencies (CRA) use different scoring models for different purposes. For instance, housing finance and car loans could employ a model different from that used for credit cards and other retail loans including personal consumption. There is still no general legal obligation on CRAs to provide credit scores to individuals. However, some credit service companies sell credit scores and advice for improving these for a fee.

Credit scoring models use complex formula taking into account a variety of information culled out from borrowers’

credit report, payment history, and credit applications, and collections, foreclosures, lawsuits, and other collection items. Typically, information pertaining to borrowers’ occupation, length of employment, asset ownership including home and car, amount of credit or debt, types of credit, new credit, and the number of credit checks, and runs among several others are used by scoring models.

Credit scoring models have long been shrouded in secrecy pertaining to types of information used and measurement of borrowers’ risks. From lenders’ perspective, there are various concerns relating to limits to disclosure and transparency. On the other hand, from borrowers’ perspective there are legal concerns relating to data protection.

Berger, A.N., Frame, W.S., and Miller, N.H., (2002) ‘Credit Scoring and the Availability , Price and Risk of Small Business Credit’, Federal Reserve Bank of Atlanta, Working Paper, 2002-6, April..

Frame, W.S., Srinivasan, A., and Wooskey, L., (2002), ‘The Effect of Credit Scoring on Small Business Lending’, Journal of Money, Credit and Banking, Vo.33 (3).

Hand, D.J., and Henkey, W.E., (1997), ‘Statistical Classification Methods in Consumer Credit Scoring: A Review’,

Journal of Royal Statistical Society, Vol.160.

Mester, L., (1997), ‘What is the Point of Credit Scoring?’,

September/October.

3.18 There has been a decline in the number of SSI-sick and non-SSI sick / weak industrial units financed by SCBs in recent years. The quantum of bank loans locked up in sick / weak industries increased from Rs.26,065 crore as at end-March 2002 to Rs 34,816 crore as at end-March 2003, recording an increase of 33.6 per cent. The share of bank loans to sick units in total bank loans increased from 4.4 per cent as at end-March 2002 to 4.8 per cent as at end-March 2003. Across broad category of sick units,

3.19 During 2003-04, banks’ lending to capital market, real estate and commodities sector increased in absolute terms. However, the exposure of SCBs to sensitive sectors accounted for only 3 per cent of aggregate bank loans and advances. Banks’ lending to capital market remained negligible at 0.4 per cent of outstanding loans and advances. The share of credit to real estate and commodities sectors in outstanding loans and advances of SCBs was 1.6 per cent and 1.2 per cent, respectively. Real estate sector accounted for the major share of 51.6 per cent of total loans to sensitive sectors followed by commodities and capital markets segments, respectively (Table III.7 and Appendix Table III.7). Among bank groups, PSBs continued to account for about 60 per cent of the total exposure of SCBs to sensitive sectors.

3.20 Besides loans and advances, banks provide financial support to the corporate sector in the form of non-SLR investments, which includes commercial paper, shares, bonds, and debentures issued by the private corporate sector and public sector undertakings (PSUs)

(Table III.8). The investment in bonds and debentures continued to be the major component of banks’ non-SLR investments, though its share in total non-SLR investments declined during the year. In absolute terms, there was a sharp increase in banks’ finance to mutual funds. The share of banks’ investment in mutual funds in total non-SLR investments increased to 8.6 per cent in 2003-04 from 4.7 per cent in 2002-03.

3.21 The outstanding amount of CDs issued by SCBs increased from Rs.1,188 crore on April 4, 2003 to Rs.4,461 crore by mid-March 2004 (Appendix Table III.8). The typical discount rate for CDs with a 3-month maturity declined from 7.2 per cent at mid-April 2003 to 5.5 per cent at end-August 2003 and further to 5.0 per cent by mid-March 2004. During 2004-05 (upto October 15, 2004), it further softened to 4.75 per cent. The outstanding amount of CDs continued to increase to Rs.4,837 crore upto October 15, 2004. The growth of CDs has been on account of a number of factors including the issuance of guidelines by the Reserve Bank on investments by banks in non-SLR debt securities, reduction in stamp duty on CDs effective March 1, 2004, ban on premature closure of CDs and greater opportunity for secondary market trading. These developments have led to greater demand for investment in CDs by mutual funds particularly in the wake of their improved funds position. An encouraging development that ensued has been that some of the top rated banks have been getting their CDs rated for better access to the market even when such ratings are not mandatory under the extant guidelines.

3.22 Easy liquidity conditions prompted companies to mobilise funds through commercial papers (CPs). The issuance of CPs picked up from mid-November 2003 on account of increased interest by mutual funds and banks in the wake of the guidelines by the Reserve Bank barring investments in non-SLR debt securities with original maturity upto one year with the exception of CDs and CPs. Furthermore, the reduction in stamp duty on CPs also buoyed up the market. The discount rates on CP eased from a range of 5.25-8.15 per cent in April 2003 to 4.70-6.50 per cent in March 2004. During 2004-05 (upto mid-November 2004), the discount rates ranged in between 5.10-6.23 per cent. The weighted average discount rate (WADR) also declined from 6.20 per cent in April 2003 to 5.11 per cent in March 2004 before increasing to 5.54 per cent in mid-November 2004. The spread of the WADR between the prime-rated and medium-rated companies narrowed from 162 basis points in April 2003 to 73 basis points in March 2004. As on mid-November 2004, the spread has further declined to 30 basis points. During the current financial year upto mid-November 2004 the most preferred maturities of CPs were ‘up to 90 days’ and ‘181 days & above’. During the current financial year (up to mid-November 2004), the share of manufacturing and other companies in the amount of CPs raised stood lower at 40 per cent (44 per cent in 2003-04), while finance/leasing companies and financial institutions accounted for 55 per cent and 5 per cent respectively, from 38 per cent and 18 per cent in 2003-04.

3.23 There has been a sharp increase in the volume in FRAs/IRS market during the current financial year so far. FRAs/IRS transactions, both in terms of number of contracts and outstanding notional principal amount, rose from 9,363 contracts amounting to Rs.2,42,983 crore as on April 4, 2003 to 19,867 contracts for Rs.5,18,260 crore as on March 19, 2004. During the current financial year up to the fortnight ended October 15, 2004, the number of contracts and notional amount have increased to 30,101 and Rs.7,99,032 crore, respectively. There has been a significant increase in the number and amount of contracts. Also, the participation in the market has been broad based and include select PSBs, PDs, foreign and private sector banks. In a majority of these contracts, NSE-MIBOR, LIBOR and MIFOR were used as the benchmark rates. The other benchmark rates used were secondary market yields of Government of India securities having residual maturity of 1 year, primary cut-off yield on 364-day Tresasury Bills, etc.

3.24 In recent years, scheduled commercial banks’ investment in government and other approved securities has been much in excess of the required statutory liquidity ratio (SLR) of 25 per cent. As at end-March 2004, investments in SLR securities constituted 41.3 per cent of net demand and time liabilities (NDTL) of banks as against 41.5 per cent as at end-March 2003.

3.25 The rate of expansion of investment in Government securities for PSBs was 21.2 per cent for 2003-04, lower by about 4 percentage points over 2002-03. Private sector banks’ investments in Government securities increased sharply by 31.5 per cent in 2003-04 as against an increase of 16.5 per cent recorded in 2002-03. The increasing preference of private banks for Government securities reflected their efforts toward improving capital to risk weighted assets ratio. Foreign banks, however, recorded a substantially lower growth of investment at 6 per cent in 2003-04 as compared with an increase of 27.6 per cent in 2002-03.

3.26 The credit-deposit ratio (C-D ratio) is one of the most widely used banking indicators for analysing the role of banks in promoting productive sectors and contributing to economic growth. In a bank-based financial system, the C-D ratio assumes greater significance as an aggregative measure for gauging the effectiveness of credit delivery system. Higher C-D ratio implies for greater credit orientation of banks. In the Indian context, however, the C-D ratio has shown a downward trend over the years. Although the deployment of credit and the time path of C-D ratio, in general, is influenced by the structural transformation of the economy, the role of credit culture and banks’ lending policy have a considerable impact on the size of the ratio (Box III.4).

3.27 According to the data available from the Basic Statistical Returns (BSR), the C-D ratio (as per sanctions) of SCBs at end-March 2004 was 58.7 per cent as against 59.2 per cent at end-March 2003. The total flow of resources, as reflected in the credit plus investment to deposit (IC-D) ratio (as per utilisation) had increased to 66.4 per cent at end-March 2003 from 65.6 per cent at end-March 2002. Region-wise, the C-D ratio (as per sanctions) showed an increase for all regions with the exception of Western region (Appendix Table III.9).

3.28 The C-D ratio though useful as an aggregate measure provides limited information about the credit orientation of banks and the access of diverse economic agents to bank credit. In this context, the alternative measures of credit market concentration have been explored by several studies for gauging the effectiveness of credit delivery system and thereby providing critical inputs for policy formulation (Box III.5).

3.29 During 2004-05 (up to October 29, 2004), aggregate deposits of scheduled commercial banks rose by 7.5 per cent (7.2 per cent, net of conversion of IDBI) as compared with an increase of 9.0 per cent in the corresponding period of the previous year. The lower deposit growth this year could be mainly attributed to reduction in non-resident Indian (NRI) deposits with the banking system. On an annual basis, the growth in aggregate deposits at 15.8 per cent (15.6 per cent, net of conversion of IDBI) was, however, higher than that of 11.8 per cent during 2003-04. During 2004-05 (up to October 29), scheduled commercial banks’ credit increased by 17.5 per cent (13.7 per cent, net of conversion of IDBI) which was substantially higher than the increase of 4.5 per cent in the corresponding period of 2003-04. Food credit increased by Rs.3,751 crore as against a decline of Rs.13,459 crore in the previous year reflecting a turn-around of about Rs.17,210 crore. Non-food credit posted a robust increase of 17.9 per cent (13.8 per cent, net of conversion of IDBI) during 2004-05 (up to October 29) as compared with an increase of 6.8 per cent in the corresponding period of 2003-04. The incremental non-food credit-deposit ratio was as high as 127.8 per cent (102 per cent, net of conversion of IDBI) during 2004-05 (up to October 29) as against 41 per cent in the corresponding period of the 2003-04.

There is growing realisation that though macroeconomic stability is necessary, several sufficient conditions assume importance for achieving sustained and rapid economic progress. Regarding various indicators of sufficient conditions, economists attach critical importance to an effective credit delivery system, which ensures better access to credit for various productive activities. About two decades ago, across countries it was believed that better access to credit could be achieved through a wide network of formal credit institutions. During the 1990s, economists while drawing lessons from the performance of formal credit institutions and the informal credit agencies have recognised that better access to credit can be achieved with an appropriate credit culture.

Conceptually, there are four basic types of credit cultures adopted by banks. These pertain to value driven, immediate-performance driven, production driven, and un-focused credit culture. The key determinants of the credit culture are the management’s commitment, credit discipline, priority-based incentives, risk-managed lines of business, as well as a clear, consistent and candid communication strategy. An effective credit delivery process entails a process for ordering and integrating priorities, culture, strategy and controls. This is possible by establishing corporate priorities, choosing a credit culture, determining the credit risk strategy and implementing risk controls (Strischek, 2003). In a competitive environment, such a strategy entails that the credit culture should be dynamic in nature.

In the Indian context, the issue of credit culture has generated an animated discussion (Reddy, 2004 and Mohan, 2003, 2004). An examination of various issues pertaining to banks’ lending policy indicated that banks should adopt prudent risk management strategies rather than risk aversion strategies in order to contribute to an effective credit delivery system. Broadly, the discussion on credit culture has surfaced amidst concerns pertaining to the underlying trends in credit-deposit ratio and rural credit, high investments in Government securities, the prevalence of category-wise lending policy, downward inflexibility of lending rates among several other developments. In this context, studies have suggested that banks should devise appropriate lending policies to ensure the success of the gradual deregulation and financial market reforms undertaken.

Mohan, R., (2003), ‘Transforming Indian Banking: In Search of a Better Tomorrow’, RBI Bulletin, January.

Mohan, R., (2004), ‘Finance for Industrial Growth’, RBI Bulletin, March.

- ‘Bonds hold attraction for India’s lazy bankers’, Times News Network, November 25, 2003.

Reddy, Y. V., (2004), ‘Credit Policy, Systems, and Culture’,

RBI Bulletin, March.

Strischek, D., (2003) ‘Credit culture Part II: Types of credit cultures’, The RMA Journal, Philadelphia, Dec 2002/Jan 2003. Vol. 85, Iss. 4, pg. 35.

Finance literature suggests that portfolio diversification is desirable for minimising credit portfolio risk, improving asset quality, and optimising efficiency in allocation of resources for productive activities. From a policy perspective, with increasing concern for financial stability across countries, measures of portfolio diversification of banks have received considerable importance. Applied models of financial stability have integrated alternative measures of credit market concentration pertaining to institutional structure of banking sector, regional and sectoral deployment of credit for evaluating and analysing the underlying nature of market competition and the stability of financial system in various countries. Measures of credit market concentration have been used for gauging the competitive efficiency of credit delivery system.

On an empirical plane, various approaches have been adopted. The extent of competition in the banking industry in a country is analysed in terms of participation of different bank groups such as public sector banks, domestic private banks and foreign banks. Several studies have used Hirschman and Herfindhal Index (HHI)⁴ of market concentration for analysing credit market concentration (BOE, Quarterly Bulletin, 2004). The World Bank database on regulation and supervision provides useful information about concentration of banking sector across countries. The study shows that among 121 countries, there were as many as 102 countries, which had five big banks accounting for more than fifty per cent of deposits. On the other hand, there were 112 countries out of 129 countries, which had five big banks accounting for more than fifty per cent of assets (Table A). According to the study, five largest banks in India accounted for about 41 per cent of banks’ deposit and 44 per cent of assets. India’s position was ranked better than that of Brazil, Chile, Mexico, Malaysia and France (Table B).

In the Indian context, an empirical analysis of credit market concentration brings forth certain useful insights. The competitive nature of the banking sector has witnessed a significant improvement due to the increasing participation of domestic private sector and foreign banks. The share of public sector banks in aggregate deposits has come down from 92 per cent in 1990-91 to 78 per cent in 2003-04 while the share of domestic private sector banks has improved from four per cent in 1990-91 to 15 per cent in 2003-04. In terms of bank credit, the share of public sector banks has come down from 92 per cent in 1990-91 to 74 per cent in 2003-04. The share of domestic private sector banks in bank credit has increased from three per cent in 1990-91 to 19 per cent in 2003-04 while the share of foreign banks has increased from four per cent in 1990-91 to seven per cent in 2003-04. Greater competition has offered customers a wider range of options both in terms of parking funds with banks as well as borrowing in a cost-effective manner.

The HHI index estimated using industry-wise deployment of credit shows a decline from the range of 1300 in 1991-92 to the range of 800 in 2003-04, thereby, suggesting an improvement in banks’ credit portfolio diversification and decline in credit market concentration. The HHI index measure based on sectoral deployment of credit also shows that credit concentration has reduced over the period 1991-92 to 2003-04.

Reference:

Bank of England (2004), ‘Banking Concentration in UK’,

Financial Stability Review, June, Article 7.

World Bank Database on Regulation and Supervision 2003.

4 HFI index = S² , where S is the share of bank credit of an industry/activity in total bank credit during time period t. Higher value of HFI over the years suggests increasing concentration and conversely lower value of HFI over the years shows improvement in credit allocations to different sectors.

3.30 In recent years, the impetus to credit growth has emanated from non-agriculture non-industrial sectors, particularly, housing, small transport operators and retail loans. The detailed information on sectoral deployment of credit available from banks reveals that over two-thirds of credit flow during the current financial year (up to August 2004) have been on account of retail, housing and other priority sector loans. More recent information available points to a revival of industrial credit. Among industries, discernible increase is observed in petroleum, infrastructure, electricity, construction, metal & metal products, drugs & pharmaceuticals, gems & jewellery and automobiles.

3.31 While credit expanded, scheduled commercial banks’ investments in bonds/ debentures/shares of public sector undertakings and private corporate sector, commercial paper etc., increased by 2.9 per cent up to October 29, 2004 as compared with a decline of 0.6 per cent. The total flow of resources from scheduled commercial banks to the commercial sector increased substantially by 16.4 per cent (12.7 per cent, net of conversion of IDBI) up to October 29, 2004 as compared with the increase of 5.9 per cent in the corresponding period of the previous year. The year-on-year growth in resource flow was also higher at 27.1 per cent (23.1 per cent, net of conversion of IDBI) as against 13.8 per cent a year ago. Scheduled commercial banks’ investments in instruments issued by financial institutions (FIs) and mutual funds this year increased by Rs.154 crore as against an increase of Rs.7,570 crore in October 2003. The total flow of resources to the commercial sector including capital issues, global depository receipts (GDRs)/American depository receipts (ADRs) and borrowings from banks and FIs increased by Rs.1,65,809 crore up to October 29, 2004 as compared with Rs.66,857 crore in the corresponding period of 2003-04.

3.32 During 2004-05 (up to October 29, 2004), scheduled commercial banks’ investment in government and other approved securities at Rs.28,955 crore (Rs 16,762 crore, net of conversion of IDBI) was lower than that of Rs.84,031 crore in the corresponding period of 2003-04 partly on account of pick-up in credit demand. Consequently, commercial banks’ excess holding of SLR securities was reduced to Rs.2,59,083 crore or 14.5 per cent of net demand and time liabilities(NDTL). Notwithstanding this reduction, the effective SLR investment at 39.5 per cent of NDTL for the banking system as a whole, continues to be high relative to the statutory minimum of 25 per cent. As credit demand is expected to remain buoyant during 2004-05, lower demand by banks for Government securities has implications for government market borrowings programme.

3.33 On an assessment of macro economic and monetary aggregates, the mid-term Review of annual policy Statement for the year 2004-05 indicated that the growth in aggregate deposits would be Rs.2,18,000 crore as projected in the annual policy Statement 2004-05 while non-food bank credit including investments in bonds/ debentures/shares of public sector undertakings and private corporate sector, commercial paper (CP) etc., is expected to increase by around 19.0 per cent, higher than 16.0-16.5 per cent projected earlier; the higher credit expansion could be accommodated without putting undue pressure on money supply because of lower borrowing of the Government from the banking sector; in the eventuality of Government borrowings being larger, unwinding of MSS would facilitate such borrowings.

3.34 In 2003-04, the total turnover including purchase and sale of foreign exchange by authorised dealers declined by 1.5 per cent. In the inter-bank segment, both purchase and sale operations remained subdued due to a stronger Indian rupee. The merchant segment witnessed an increase in purchase operations and a decline in sale operations in tandem with the movements in the imports and exports. (Table III.9). The inter-bank to merchant turnover ratio hovered in the range of 2.9 per cent to 3.9 during the year, indicating orderly market conditions.

3.35 International banking statistics (IBS) assume critical importance as they provide information about the integration of a country’s financial sector with rest of the world. The Reserve Bank has been compiling and disseminating IBS on the lines of the reporting system devised by the Bank for International Settlements (BIS). The data on IBS of India, presented under locational banking statistics (LBS) and consolidated banking statistics (CBS), are supplied to the BIS, which are included in their quarterly publications.

3.36 During 2003-04, international liabilities of banks increased by 10 per cent, as against an increase of 17 per cent in 2002-03 driven by the accretion to non-resident external rupee (NRE) deposits and sizeable foreign currency borrowings. The foreign currency borrowings witnessed a sharp growth of 82 per cent during the year (Table III.10). The surge in NRE accounts recorded in 2002-03 also continued in 2003-04. The foreign currency borrowing showed a sizeable expansion due to various liberalisation measures relating to the capital account for facilitating residents’ foreign currency requirement for productive purposes. In particular, the surge in foreign currency