By Ishita Misra
Even though Indias economy has been rapidly developing since liberalisation in 1991, the disparity in credit disbursement among the Indian states has been on the rise. The total bank credit has seen a tremendous increase from Rs. 1,04,300 crore in 1990 to Rs. 68,78,500 crore in 2015. However, the southern and western states control a majority of the credit with 5 of them controlling 60.6% of it. This trend varies greatly from that of other countries with large economies, such as China and the US. These countries witnessed a decrease in the disparity in credit disbursement with the development of their economies, a phenomenon which indicates that India needs to actively take steps to narrow the gap between its states.
Who has the biggest slice of the pie?
As mentioned before, 60.6% of the total credit was controlled by the southern states of Tamil Nadu, Andhra Pradesh and Karnataka and the western states of Maharashtra and Gujarat as per the financial year of 2014-15. Even among these states, there exists considerable disparity. The loans received by Maharashtra itself were more than the combined loans received by Tamil Nadu, Andhra Pradesh and Karnataka. The region that received the third highest amount of loans was the northern region, followed by the central and eastern regions. Meanwhile, the north-eastern states received the lowest amount of loan totalling to Rs. 53,600 crores, making up only 0.78% of the total credit; even though the region accounts for 8% of the Indian landmass area. Therefore, the disparity in credit disbursement among the states is evident.
Reasons for the credit imbalance between states
According to an empirical analysis of credit inequality across Indian states done by Snehal Herwadkar and Saurabh Ghosh, differences in availability of funds and banking networks are the biggest contributors to this problem. Indian states have different banking networks. Some have elaborate networks and banking facilities that are widely accessible while the other states need development. A widespread banking network ensures that more people in the state have access to credit and thus, directly affects the total amount of credit that a state possesses.
Other factors that influence credit disbursements are infrastructure facilities, state GDP and fiscal deficit. The major infrastructural facilities that affect credit disbursement are transport and power. Improvement of these facilities increases the productivity of regions, which encourages banks to provide loans to them. This effect can be understood by comparing the amount of credit controlled by the southern and western states in 1990 and 2015. In 1990, the southern states held more credit than the western states but the trend was reversed in 2015. This change in the trend is attributed to the higher level of industrialisation which accelerated development in the western states, leaving the southern states behind. Furthermore, the states in which the service sector is a major contributor to the GDP, attract more credit as the sector is thought to be the driving force behind the growth of the Indian economy. Lastly, a large state deficit has a negative impact on credit disbursement as it is associated with high-risk loans.
Reversing the trend with government intervention
Government intervention, in terms of introducing new programs, can lead to a decrease in the disparity in credit disbursement among states. One such program is the Jan Dhan Yojana. Its aim is to ensure that every Indian family has a bank account which includes a debit card as well as accident and life insurance. Through this program, the problem of banking networks can be largely tackled as it will spread formal banking channels and allow access to formal credit lines for everyone. Reversing the trend of growing disparity will also have a big impact on the entire Indian economy. Improvement in the financial sector and the increase in bank credit in a state is strongly linked to an increase in the economic growth of the state. As more people have access to loans they have an opportunity to start businesses and invest money, thus contributing to the GDP.
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