Financial inclusion, or providing banking services to people who do not have access to them, is the mantra du jour of the Reserve Bank of India. Banks have been urged to review their practices to promote financial inclusion. They have been advised to open no-frills or basic accounts with minimum balances and the ‘know-your customer’ guidelines for opening such accounts have been simplified. A concerted effort is being made to seek out new credit delivery methods such as through self-help groups or special credit cards. Banks are also exploring how they can use new technology to reach the rural areas.
But what is the state of financial inclusion in the states? Which states are under-banked and which regions hold the maximum potential for banks? One way of answering these questions is to consider deposits of scheduled commercial banks and bank credit as a proportion of a net state domestic product (NSDP) at current prices. The NSDP is a measure of the economic activity in the state and comparing it with the utilisation of bank credit or the bank deposits indicates how much of economic activity is being financed by banks and whether there exists untapped potential for increasing deposits in that state.
See ‘Imbalance Sheet’. It shows bank credit utilised in a state as a percentage of NSDP at current prices and bank deposits in a state as a share of NSDP. The data is for 2003-04, as the latest available on state domestic product (SDP). SDP is a flow variable while outstanding bank credit or total deposits are stock variables. Even so, a comparison does indicate how much of a state’s potential is being tapped by banks.
The data also shows some surprising results. For instance, the percentage of bank deposits to NSDP is pretty high in Bihar and Jharkhand, or these states are not as under-banked as thought to be. The ratio for Uttar Pradesh, for example, is much lower than that for Bihar. While it is well-known that the north-eastern states are under-banked, states such as Andhra Pradesh, Haryana and Rajasthan, too, have a low bank deposits-NSDP ratio. In contrast, banks have already tapped most of the potential of states such as Punjab and Maharashtra as far as bank deposits are concerned.
Hill states such as Sikkim, Himachal Pradesh and even Arunachal Pradesh have a surprisingly high proportion of bank deposits to SDP. It is also possible that some deposits of Haryana residents may actually be in banks in Delhi, explaining Haryana’s low figure. While the logistics of expanding in the hilly areas of the north-east may be daunting, if banks wish to expand into those areas where the potential of deposits has been relatively untapped, they would be well advised to expand in states such as Andhra Pradesh, Haryana, Chhattisgarh, Madhya Pradesh, Orissa and Rajasthan.
The data on the ‘bank credit utilised to SDP’ gives more predictable results, with the north-eastern states at the bottom of the ladder along with Bihar and Jharkhand, while the southern states do very well. Gujarat’s relatively low rank is probably because businesses there have access to different sources of funding: non-banking financial institutions, co-operative banks and equity.
The data also shows that bank expansion has been skewed, though economic potential exists. That is, even in relation to the level of economic activity, bank penetration in many states has remained low, and could be scaled up.
Businessworld.
