Commercial Bank Lending to Small-Scale Industry
It is believed that the working capital support extended by commercial banks to small-scale industry is far from adequate. Although the SSI is a part of the priority sector, its share in total priority sector advances of all scheduled commercial banks has been falling consistently from around 39 per cent in 1992 to around 24 per cent in 2004. This paper examines the trends in sectoral allocation of bank credit to the SSI vis-à-vis the non-SSI sector in the post-reform period. The paper also makes an attempt to understand the variations in bank credit to the SSI sector across bank groups, and also the influence of the size and performance of banks on credit to the SSI sector. The results indicate that the high incidence of bad loans arising out of SSI advances could be one of the reasons for the declining share of SSI loans of the commercial banks.
K S RAMACHANDRA RAO, ABHIMAN DAS, ARVIND KUMAR SINGH
I Introduction
C
According to the third all-India census of SSIs (2001-02), there were 105 lakh industrial units working in the small scale sector employing 249.3 lakh personnel as at the end of March 2002. The total output (gross) of the small-scale sector is placed at Rs 2,82,269 crore in 2001-02 (at current prices), which was roughly 13 per cent of total GDP. However, a summary of the financial accounts of these units is not readily available. For the financial year 2001-02, around 18 per cent of the SSI units (registered) reporting outstanding loans, 14.9 per cent of the units reported loans from banks and financial institutions [Development Commissioner 2003]. In the case of unregistered units, similar shares of units reporting loans are at 6.1 per cent and
3.6 per cent, respectively. It is well recognised that the key market failure facing the SSIs is in the capital market [Mohan 2001]. These enterprises traditionally lack institutional finance for start ups and face higher cost of credit relative to large enterprises. The working capital support extended by commercial banks is evidently far from adequate. Lack of proper credit assessment techniques and expertise, higher transaction cost, and, more importantly, the higher incidence of non-performing loans do not encourage the commercial banks to extend credit to the SSI sector. In the absence of any quantitative restriction to SSI lending within the priority sector, commercial banks have enough leeway of diverting funds to “other priority sectors” like housing, retail trade, etc, and thereby meeting the overall target. Illustratively, around 58 per cent of total priority sector lending in 1969, the period when priority sector lending was introduced, was extended towards the SSI sector. This share has been falling consistently; it was around 39 per cent in 1992, declining thereafter to around 24 per cent in 2004 (RBI, Report on Trend and Progress of Banking in India, 2003-04). Although such developments reflect the changing facets of economic progress, there is a genuine concern about the falling share of credit to the SSI sector. The details of outstanding loans of the SSI sector obtained from banks and financial institutions are not available from the census. Such data, however, can be obtained from an alternative source, viz, basic statistical return (BSR)-1 system, published by the Reserve Bank of India. This system provides the information on credit extended to various industries, including the SSI sector.
The objective of the paper is to analyse the trends in commercial banks’ credit to small-scale industry sector during the postliberalisation period. The paper provides a brief account of SSIs based on the third all-India census (2001-02) data and related developments in credit deployment to the SSI sector of all scheduled commercial banks. Against this background, this study empirically quantifies the sectoral allocation of bank credit to SSI vis-à-vis non-SSI sector in the post-reform period. In addition, the analysis attempts to understand variations in bank credit to the SSI sector across bank groups, and also the influence of size and performance of banks on credit to the SSI sector. The study covers the period from 1992 to 2003.
The paper is organised into six sections. Section II presents sources of data, data coverage and classification of banks according to different characteristics. Section III briefly reviews the major factors affecting the supply of bank credit by commercial banks during the study period. Section IV analyses various facets of the SSI sector vis-à-vis the credit extended by commercial banks to the sector. Trends in credit extended to SSI
Chart 1: Movements in Statutory Ratios
45 40 35 30 25 20 15 10 5 0
1990 1995 2000 2005 Year
Per cent
according to bank groups, size and performance of a bank are discussed in Section V. Some econometric evidence on the determinants of SSI lending is presented in Section VI. A summary and the conclusions are presented in the last section.
II Data Coverage and Limitations
Data Coverage
The study covers 97 scheduled commercial banks, excluding regional rural banks (RRBs). These banks are classified into four groups, viz, State Bank of India and its associates (SBIA), nationalised banks (NB), foreign banks (FB) and other scheduled commercial banks (OSCB). These banks are also classified broadly into three size classes, based on the total assets as on March 31, 2003. The size classes are: (i) total assets of size less than Rs 5,000 crore (termed as “small”), (ii) total assets of Rs 5,000 to Rs 20,000 crore (“medium”) and (iii) total assets of Rs 20,000 crore and above (“large”). The size of the bank has been maintained the same for the entire study period. The data on total assets for individual banks included in the study are based on their annual accounts, taken from RBI (2003). The distribution of banks according to bank groups and asset size classes is given in Table 1. It may be seen from the table that majority of banks in the “small” size class are foreign banks, while the rest are other scheduled commercial banks. The public sector banks are mostly in the “large” size class.
Data on the developments in the SSI sector, viz, number of units, output, and employment, etc, are obtained from the third all-India census of SSIs (2001-02). The classification and composition of credit according to bank groups and other characteristics are based on the ‘Basic Statistical Return of Scheduled Commercial Banks’, published by the RBI (2004).3 BSR 1 data according to bank groups and size classes of banks are specially obtained from the Reserve Bank. Certain performance indicators (profitability ratios) across bank groups and size classes are based on the data in Statistical Tables Relating to Banks in India, published by the RBI. Concepts and definitions in respect of various items described in the paper are given in the Annex.
Limitations
Banks are classified into three size classes based on the size of total assets as on end-March 2003. This classification has been maintained for the entire period of the study from 1992 to 2003 and it does not take into account the size class in the previous years. Implicitly, it assumes that banks remain within the same size class throughout the period of study. For uniformity, the requisite data on total non-food credit, total credit to industry, credit to small-scale industry, etc, are drawn from the BSR publication. As such, the growth rates derived from this source may vary marginally from those derived from other sources due to coverage, timing and reporting differences. A few selected indicators of rate of return are obtained for each bank group as an average of the ratios of banks included in the particular bank group or size class. A company is classified under small-scale industry depending upon the value of total investment in plant and machinery of the company. The threshold value of total assets, as also the definition of a small-scale industry, have been revised from time to time. As such, the coverage of the SSI sector over the period could have been widened or narrowed down. The growth rates in output of the SSI sector and credit to the sector would thus include the effects of definitional and coverage changes. It is not feasible to separate these effects. It is assumed that the above changes would not affect, significantly, the results of the study.
III Factors Affecting Supply of Credit
The Indian economy entered a new phase of economic reforms from 1991-92. The recommendations of the Narasimham Committee [RBI 1991] set a road map for the reforms in the financial sector. The statutory measures like cash reserve ratio (CRR), statutory liquidity ratio (SLR) and the bank rate underwent a series of changes through relaxation of the controls hitherto imposed on the banking sector. The CRR, SLR and bank rate were ruling high in the beginning of the 1990s – around 15 per cent, 31.5 per cent and 12 per cent, respectively. Besides high rates, the banking system was also subject to sector specific credit ceilings. These factors restricted the availability of funds with the banking system for credit disbursement. With the advent of reforms and implementation of the Narasimham Committee recommendations, these ratios and the bank rate were gradually lowered and more funds were made available to banks for credit delivery purposes. The movements in CRR, SLR and the bank rate as on end-March 1992 to 2003 are given in Chart 1. The chart, however, do not depict all the points of changes made in the measures, but show only the position as at the end of March, every year.
Besides the above measures, the economy also witnessed significant change in the interest rate structure, viz, deposit and lending rates, and also in the credit delivery system. The interest rates on saving deposits and term deposits were lowered, besides restructuring the term deposit rates. The banks were also set free to fix the rates for different maturity patterns. On the lending
Table 1: Coverage and Classification of Scheduled Commercial Banks
| Bank Group (BG) | Size Class (SC) | Total | ||
|---|---|---|---|---|
| Small | Medium | Large | ||
| SBIA | - | 6 | 2 | 8 |
| NB | - | 3 | 16 | 19 |
| FB | 33 | 6 | 1 | 40 |
| OSCB | 17 | 11 | 2 | 30 |
| Total | 50 | 26 | 21 | 97 |
| (51.6) | (26.8) | (21.6) | (100.0) |
Rate (per cent)
Chart 2: Average Interest Rate on Credit to SSI Sector and PLR
20.00
18.00
16.00
14.00
12.00
10.00
| 1990 | 1992 | 1994 | 1996 | 1998 | 2000 | 2002 | 2004 | 2006 |
| Year | ||||||||
|
WIR | PLR |
side, the interest rates were sector specific and programme specific till 1989. These interest rates were modified and restructured, and various slabs of credit limits were introduced from time to time. Advances were subjected to a fixed ceiling for lending rates at 16.5 per cent till October 1988, which was removed and advances were subjected to a minimum rate. The minimum rate was at 19 per cent for credit limits over Rs 2 lakh in 1992 and it has been reduced gradually and banks were free to set the interest rate for these credit limits, from 1994 onwards. The banks were allowed to prescribe a separate prime term lending rate with the approval of their boards for term loans of three years and above in 1997 and after modifying the slab structure, credit limits of “over Rs 25,000” and “upto Rs 2 lakh” have been merged together and the interest rate on loans of these credit limits was prescribed at “not exceeding prime lending rate (PLR)” so as to remove the disincentive to the flow of credit to small borrowers of credit limits of Rs 2 lakh and below. Besides these, the interest rates on other specific advances, such as credit to small-scale industries, pre- and post-shipment credit, export credit, etc, were also rationalised and changed in consonance with other interest rates.4 As a result, the weighted average interest rate (WIR) on credit to SSI and PLR of banks recorded noticeable decline during the post-reform period.
The RBI introduced various measures, from time to time, under selective credit controls aimed at curbing inflationary pressures, promoting effective use of credit and preventing large borrowers from pre-empting the use of scarce credit [RBI 1985, Chakravarty Committee Report]. The credit delivery system has undergone significant changes during the period of the 1980s and also in 1990s, the period of economic reforms. In this process, the programme and sector specific prescriptions were discontinued, except loans under DIR Scheme, exports and priority sectors. The reform also did away with distinguishing working capital loans and term loans for accounts with credit limits over Rs 25,000 for agriculture, small-scale industries and road transport operators.
An important development is that banks were given operational autonomy in fixation of inventory and receivable levels, and setting the credit limits. To overcome the problems associated with cash credit and also to bring about discipline in the utilisation of bank credit by large borrowers so as to gain better control over the credit flow, a “loan system” for delivery of bank credit was introduced in 1995. Under this system, the maximum permissible bank finance (MPBF) has been worked out and a part is allocated under “loan” component and the remaining under “cash credit”. Their shares in total MPBF were revised from time to time.
With regard to small-scale industries, the RBI stipulated the process of loan delivery system by introducing a package of measures in April 1993, based on the recommendations of the committee to examine the adequacy of institutional credit to the small-scale industries sector (chairperson: P R Nayak). A one man committee (chairperson: S L Kapoor) was set up by RBI in December 1997, to review the working of credit delivery of small-scale industries. The committee recommended, inter alia, to give special treatment to SSI, to change the definition of sick SSI units, and to enhance the role of SIDBI and NABARD. The provision relating to consortium arrangements were simplified and banks were given the freedom to fix inventory, receivable levels and sanction of ad hoc credit limits. Further, another working group on flow of credit to the SSI sector (chairperson: A S Ganguly) was set up in 2003-04, by the RBI to further enhance the flow of credit to the SSI sector. The group submitted its report in April 2004.
Thus, credit to industry was affected by the monetary regulations, indicating available resources for credit purposes, the sectoral specific credit limits as well as interest rate differentials, provisions relating to the SSI sector and changing definition of the SSI sector. Against this background, it would be interesting to see the growth in credit to SSI against the performance of the sector.
IV Performance of SSI Sector
Traditionally, a large proportion of SSI units in India are under the unregistered sector. For example, out of a total of 105 lakh units in SSI in 2001-02, more than 91 lakh (87 per cent) belong to the unregistered sector. However, so far as the total gross output of the SSI sector is concerned, the registered sector accounts for the major share – 72 per cent (Table 2). The share of SSI output (gross) as per cent to total GDP in 2001-02 stood roughly at 14 per cent. As per the latest census information, the SSI sector generated employment of as many as 249 lakh people, of which around 33 lakh (13 per cent) employees are women. In terms of the total workforce (based on 2001 population census), SSI employment constitutes a share of 6.2 per cent.
The size (based on gross output) distribution of SSI is highly skewed; more than 70 per cent of the units employing roughly 39 per cent of the SSI workforce produced an output below Rs 1 lakh. In contrast, less than 4 per cent of the units produced a gross output of over Rs 50 lakh. Besides, the top 20 industries account for more than half of the total units of SSI. During 2001-02, the export of SSIs stood at US $ 14,199 million; the
Table 2: An Account of SSI Sector: 2001-02
Parameters Registered Unregistered Total
| Size of the sector (units) 1374974 | 9146216 | 10521190 |
|---|---|---|
| (13.1) | (86.9) | (100.0) |
| No of SSIs 901291 | 3544577 | 4445868 |
| (20.3) | (79.7) | (100.0) |
| Total employment 6163479 | 18769284 | 24932763 |
| (24.7) | (75.3) | (100.0) |
| Female employment 974713 | 2342783 | 3317496 |
| (29.4) | (70.6) | (100.0) |
| Total output (gross) in Rs lakh 20325462 | 7901536 | 28226998 |
| (72.0) | (28.0) | (100.0) |
| Export (US $ million) 12308 | 1891 | 14199 |
| (86.7) | (13.3) | (100.0) |
| Share of top 20 industries: Units | 51.8 | |
| Employment | 39.7 | |
| Share of SSI output as per cent to GDP | 13.6 | |
| Note: Figures in brackets are percentages. | ||
| Source: Third All-India Census of SSI, 2001-02. |
registered sector generated around 87 per cent of total exports. Despite changes in the definition and coverage of SSI units during 1987-88 to 2001-02, i e, the period between the 2nd and 3rd censuses of SSI, the registered sector recorded an annual average growth (compound) of 12 per cent in production at current prices.5 During the same period, employment in the registered sector increased by a compound growth rate of 3.8 per cent. On the other hand, the nominal bank credit to the sector increased only by 11.7 per cent annually.
V Analysis of Commercial Banks’ Credit to SSI
Bank Credit to SSI sector vis-a-vis Total Industry
Table 3 presents the growth in bank credit to small-scale industry vis-à-vis the growth in credit to industry (manufacturing) as a whole and total bank credit. While the average annual growth in credit to SSI sector was 11.4 per cent during 1991-92 to 2003-04, similar growth in credit to total industry was high at
14.4 per cent and that in total credit was at 16.3 per cent during the same period. Thus, credit to SSI witnessed a low growth rate during the period under review. It is also observed from the table that the annual growth rates in credit to the SSI sector fluctuated widely between -3.6 per cent and 21.7 per cent compared with the range of 7.3 per cent to 27.1 per cent for total industry.
Further, the share of credit to total industry in total bank credit increased in the first half of 1990s, declining after 1996-97, with fluctuations, from 49.3 per cent to 38 per cent in 2004. The share of SSI declined continuously from 13.9 per cent in 1992 to 8.1 per cent in 2004. Thus, the decline in the share of SSI is more steep than that of total industry. Looking at these growth rates and shares of credit to SSI sector, it would be interesting to see how different bank groups extended credit to SSI.
Credit to SSI Sector according to Bank Groups
Before examining the credit growth to SSI sector, it may be worthwhile to look broadly at the credit extended to the industry (manufacturing) sector by different bank groups. It may be seen from Table 4 that among the four bank groups, credit of OSCBs to industry recorded the highest growth rates, except in 2001, during the period 1992-93 to 2002-03. The growth rates fluctuated during the period across all bank groups. While SBIA, NB and FB groups recorded declines in their growth rates of credit to industry in 2002, OSCBs registered a high growth of 116 per cent during the year. Secondly, the second half of the 1990s registered higher growth rates in credit to industry for all four bank groups than the growth rates recorded during 2000-03. The growth rates fluctuated widely across all bank groups.
Considering the SSI and non-SSI groups of total industry, the growth rates in credit to SSI are lower than those of non-SSI credit for all bank groups (Table 5), during the period under review, with a few exceptions. There was no uniform pattern in credit growth to SSI or non-SSI sector recorded by all bank groups. The period after 2000, however, witnessed lower growth rates in credit to SSI and also to non-SSI than those in period prior to 2000, except in certain years and bank groups. As observed earlier for total industry, the OSCB group recorded higher growth rates in credit to the SSI sector than the other bank groups. Credit to the SSI sector by OSCBs, however, registered very low growth (–1.6 per cent to 4 per cent) during 2001 to 2003. The FBs registered very large growth rates in 1995 and 1996, again witnessing a large increase of 80.1 per cent in 2001 and a steep decline of –35.3 per cent in 2002. The high growth in credit to industry by OSCBs, referred to earlier, has been observed for the non-SSI sector in 2002.
Table 3: Growth in Total Bank Credit to Industry(Manufacturing) and SSI Sector
(Per cent)
Year Growth Rate in Bank Credit Per Cent Share in (end Total Bank Credit Total Industry March) Total To Total To SSI Total SSI SSI
Industry Sector Industry Sector Sector
1992 10.1 10.4 5.6 47.7 13.9 29.0 1993 18.8 21.1 10.8 48.6 12.9 26.6 1994 8.3 7.3 14.3 48.2 13.6 28.3 1995 19.9 13.6 21.7 45.6 13.8 30.3 1996 20.7 27.1 17.4 48.0 13.5 28.0 1997 11.7 14.8 11.5 49.3 13.4 27.2 1998 16.0 14.8 19.8 48.8 13.8 28.4 1999 15.9 16.7 12.9 49.2 13.5 27.5 2000 20.3 13.7 10.4 46.5 12.4 26.7 2001 17.0 10.6 5.5 43.9 11.2 25.4 2002 21.8 14.8 11.6 41.1 10.2 24.7 2003 15.2 14.1 -3.6 41.0 8.6 20.9 2004 16.5 8.1 10.7 38.0 8.1 21.4 Annual average growth rate 16.3 14.4 11.4
Note: Data for 2002 are not adjusted for merger of ICICI.
Source: Basic Statistical Returns of Scheduled Commercial Banks (various issues) and Handbook of Statistics, 2003-04, RBI.
Table 4: Growth in Bank Credit to Industry Accordingto Bank Groups
(Per cent)
| Year (end-March) | SBIA | NB | FB | OSCB | ACB |
|---|---|---|---|---|---|
| 1993 | 38.4 | 17.6 | -5.7 | 28.5 | 21.3 |
| 1994 | 15.6 | 4.0 | -11.1 | 42.4 | 7.7 |
| 1995 | -3.9 | 20.0 | 42.7 | 34.9 | 13.7 |
| 1996 | 29.8 | 18.3 | 54.8 | 66.6 | 27.9 |
| 1997 | 16.6 | 9.4 | 16.4 | 34.4 | 14.1 |
| 1998 | 16.5 | 11.5 | 7.9 | 40.5 | 14.9 |
| 1999 | 13.6 | 18.4 | 6.7 | 33.0 | 16.8 |
| 2000 | 10.2 | 12.0 | 14.5 | 40.0 | 14.6 |
| 2001 | 6.4 | 10.9 | 15.7 | 11.5 | 10.1 |
| 2002 | -7.4 | -0.5 | -6.8 | 116.0 | 11.8 |
| 2003 | 7.4 | 12.1 | -4.1 | 25.1 | 12.7 |
Source: Basic Statistical Returns of Scheduled Commercial Banks, RBI.
Table 5: Growth in Bank Credit to SSI and Non-SSI According to Bank Groups
(Per cent)
Year SBIA NB FB OSCB (end March) SSI NSSI SSI NSSI SSI NSSI SSI NSSI
1993 5.1 50.3 13.9 19.2 -12.8 -5.5 26.4 29.7 1994 14.3 15.9 4.2 4.0 17.5 -12.0 28.0 50.1 1995 7.2 -6.6 8.5 24.9 52.5 42.3 43.4 31.0 1996 20.6 32.4 19.9 17.6 48.7 55.0 28.6 85.8 1997 11.1 18.0 -1.5 13.5 10.2 16.6 28.9 36.4 1998 5.4 19.2 3.6 14.1 -4.1 8.4 32.2 43.2 1999 26.0 10.9 1.5 23.4 -4.0 7.0 18.2 37.5 2000 12.0 9.8 14.8 11.4 6.9 14.7 10.2 47.8 2001 2.6 7.4 0.3 13.6 80.1 13.9 4.0 13.0 2002 -11.9 -6.3 0.1 -0.6 -35.3 -5.6 4.4 136.1 2003 Neg. 9.1 28.7 8.4 0.8 -4.3 -1.6 27.2
Notes: (1) Bank groups as defined earlier.
(2) NSSI: Non-SSI sector. Source: As in Table 2.
As the growth rates did not give any clear idea about the progress of credit to SSI by different bank groups, a close look at the shares of credit to the SSI sector in total non-food credit and total credit to industry is worth noting (Tables 6 and 7). It may be seen from Table 4 that there was a perceptible decline in the SSI’s share in non-food credit during the period of study (viz, 1992 to 2003) for all bank groups. While the share was the highest in respect of nationalised banks (NBs) (at 13.8 per cent in 1992, which declined to 7 per cent in 2003), the share of SSI was low in foreign banks’ credit (declined from 2 per cent to 1.4 per cent). Similarly, the share of credit to SSI in total industry’s credit also declined for all SCBs taken together and also for all bank groups during the period under review (Table 7). At the aggregate level, the share fell from 26.1 per cent to 14.4 per cent during the period 1992-2003. The share of credit to SSI in total industry in respect of OSCBs recorded a sharp fall by more than half from around 36 per cent in 1992 to 15.2 per cent in 2001, which further fell steeply to 5.8 per cent in 2003. In respect of foreign banks, the share of SSI was low and fluctuated in the range of 2.8 per cent and 4.3 per cent during the period of the study.
Bank Credit to Industry by Size of SCBs
Another dimension examined is whether the size of a commercial bank would influence the bank in credit expansion to small-scale industry. Tables 6 to 8 present the growth rates/shares of credit extended to the SSI and non-SSI sector, classified by the size of a commercial bank. As mentioned earlier, all SCBs are classified into three size classes, based on their total assets, viz, less than Rs 5,000 crore (small), Rs 5,000 to 20,000 crore (medium) and Rs 20,000 crore and above (large), based on their size of total assets as on March 2003.
It may be seen from Table 8 that the growth in credit to total industry is lower in the case of large sized banks compared to that of small and medium banks, with a few exceptions. The growth rates also fluctuated during the period of the study in respect of the three categories of banks. The large banks, however, showed a positive growth of 18 per cent in 2002 compared to a decline of 3.2 to 3.6 per cent by small and medium banks. It is also observed that the share of credit to industry in the total non-food credit hovered in the range of 45 to 50 per cent in respect of medium and large banks during 1993 to 2000, while the share was more than 50 per cent during 1996-2001 for small banks. The share in respect of large and medium banks declined during the period while the small sized banks recorded a decline from 2000 onwards.
Classifying the total industry into small scale and other than small scale (non-SSI), it is observed that credit to small-scale industries witnessed low growth rates for large banks, except in 1996, 1999, 2000 and 2003 (Table 9). The small sized banks witnessed a low growth of 2.5 per cent in 2001 and declines in credit to SSI during 2002 and 2003, although their credit to SSI registered high growth rates, ranging 20.5 to 32.9 per cent prior to 2001 (except in 1998). Credit to non-SSI also experienced fluctuating growth rates for all the three size classes of banks. The small and medium sized banks, however, witnessed higher growth rates in credit to non-SSI in a few years compared to the growth rates in respect of large banks.
Table 6: Share of SSI in Total Non-Food Credit of SCBs According to Bank Groups
(Per cent)
Year (end March) SBIA NB FB OSCB ACB
1992 13.1 13.8 2.0 11.1 12.4 1993 10.3 13.6 1.8 11.1 11.6 1994 10.3 13.3 2.2 11.2 11.5 1995 10.3 11.9 2.4 11.3 10.6 1996 10.3 12.4 2.4 9.7 10.6 1997 10.2 11.4 2.4 9.7 10.0 1998 9.5 10.2 2.0 9.8 9.2 1999 10.4 8.9 1.8 9.5 8.8 2000 9.9 8.5 1.6 7.6 8.2 2001 9.0 7.4 2.4 6.4 7.2 2002 7.0 6.2 1.5 4.1 5.7 2003 6.2 7.0 1.4 3.2 5.7
Source: As in Table 2.
Table 7: Share of SSI in Bank Credit to Industry Accordingto Bank Groups
(Per cent)
Year (end March) SBIA NB FB OSCB Total
1992 26.2 30.7 3.1 35.7 26.1 1993 19.9 29.8 2.9 35.1 24.0 1994 19.7 29.8 3.8 31.5 24.1 1995 22.0 27.0 4.0 33.5 23.4 1996 20.4 27.4 3.9 25.9 22.2 1997 19.5 24.6 3.7 24.8 20.4 1998 17.6 22.9 3.3 23.3 18.9 1999 19.5 19.6 2.9 20.7 17.9 2000 19.8 20.1 2.8 16.3 17.7 2001 19.1 18.2 4.3 15.2 16.5 2002 18.2 18.3 3.0 7.4 14.1 2003 17.0 21.0 3.1 5.8 14.4
Source: As in Table 2.
Table 8: Growth in Bank Credit to Industry Accordingto Size of Banks
(Per cent)
Year (end March) Size of the Bank Small Medium Large
1993 31.9 (40.3) 2.4 (46.5) 25.3 (48.5) 1994 19.1(48.3) 9.7 (45.5) 6.8 (48.0) 1995 43.8 (49.4) 34.2 (45.7) 7.9 (45.0) 1996 42.6 (52.4) 39.6 (48.8) 23.9 (47.2) 1997 15.3 (51.0) 21.8 (49.8) 11.9 (48.8) 1998 16.8 (52.1) 14.8 (49.4) 14.7 (48.2) 1999 7.7 (55.4) 20.7 (49.7) 16.4 (48.5) 2000 21.5 (51.2) 17.3 (47.7) 13.2 (45.6) 2001 9.7 (50.0) 6.5 (43.8) 11.4 (43.4) 2002 -3.2 (46.0) -3.6 (37.6) 18.0 (40.4) 2003 -13.9 (41.5) 12.9 (36.1) 14.5 (40.0)
Notes: (1) Size classes as defined earlier. (2) Figures in brackets are percentage shares of industry in total non-food credit.
Table 9: Growth in Credit to SSI and Non-SSI Accordingto Size of Banks
(Per cent)
Year (end March) Small Medium Large SSI NSSI SSI NSSI SSI NSSI
| 1993 | 24.9 | 33.1 | 33.9 | -5.2 | 7.4 | 32.3 |
|---|---|---|---|---|---|---|
| 1994 | 28.0 | 17.5 | 15.2 | 7.8 | 6.3 | 6.9 |
| 1995 | 32.4 | 46.0 | 29.0 | 36.1 | 5.7 | 8.6 |
| 1996 | 32.9 | 44.2 | 22.1 | 45.6 | 20.5 | 25.0 |
| 1997 | 22.6 | 14.2 | 15.4 | 23.6 | 0.8 | 15.1 |
| 1998 | 14.0 | 17.3 | 7.9 | 16.7 | 5.8 | 17.0 |
| 1999 | 22.2 | 5.3 | 1.7 | 25.4 | 12.9 | 17.2 |
| 2000 | 20.5 | 21.7 | 22.3 | 16.3 | 10.0 | 14.0 |
| 2001 | 2.5 | 11.1 | 8.6 | 6.0 | 1.0 | 13.6 |
| 2002 | -8.3 | -2.3 | -5.9 | -3.1 | -3.7 | 22.2 |
| 2003 | -17.3 | -13.4 | 7.5 | 14.0 | 20.1 | 13.7 |
| Note: | Size classes as defined earlier. | |||||
| Source: As in Table 2. |
marginally declined in the case of small banks from around 15.5 per cent to 13.5 per cent during 1992 to 2003. In the case of medium sized banks, the share increased marginally during the 1990s but declined thereafter and hovered around 16 to 17 per cent. In the case of large banks, there is a perceptible decline in the share from 28.2 per cent in 1992 to 13.9 per cent in 2003. Although the growth rate in credit to small-scale industry across the three size classes of banks showed a fluctuating trend, the share of SSI has consistently declined during the period of study in respect of all sizes of the banks.
Effect of Bank Performance on Credit to SSI
In this subsection, an attempt is made to examine whether the performance of commercial banks has any effect on their credit extension to the small-scale industry sector. For this purpose, the classification according to bank group and size classification of the banks has been considered. The performance of banks has been measured in terms of two selected measures, viz, return on assets (RoA) and the spread (SP). The return on advances is defined as the ratio of net profit to average assets, whereas the spread is the ratio of net interest margin to total assets. Further details of these two ratios are given in the annex.
The selected indicators of performance, namely, return on advances and spread of the banks according to bank groups are given in Table 11. It is observed that RoA fluctuated during the period of the study in respect of all bank groups. The return was negative in 1996 for the SBIA group, and in 1993, 1994 and 1996 for NB group. The return was more than 1 per cent in 1998 and 2003 for SBI group, in 1997 and 1998 for OSCB, and 1992 to 1997 (except 1993) for FB group. The return was less than 1 per cent in all other years and for all bank groups. However, the RoAs are consistently positive for the OSCBs group, while that of foreign banks is higher than that of other bank groups during 1993 to 1997. The foreign banks, however, experienced a fall in return during the subsequent period. The RoA across four bank groups did not indicate any particular pattern during the period under review. The spread registered a decline during the period of the study in respect of the SBIA group, foreign banks and the OSCBs group from 4.5 to 3.1 per cent, 4.9 to 3.3 per cent and 3.9 per cent to 2.3 per cent, respectively. In the case of nationalised banks, the spread, however, fluctuated around
2.6 to 3 per cent, except in 1993 and 1994. The spread of SBIA and FB groups stood higher than that of the NB and OSCB groups throughout the period of the study.
Classifying these banks according to their size, it is observed from Table 12 that the return on advances was above 1 per cent during 1992 and 1995 to 1997 in respect of small banks, in the years 1997, 1998, 2000, 2002 and 2003 in the case of medium banks, and only in 2003 in the case of large banks. The RoA was negative or very low for large banks in 1993, 1994 and 1996. The spread has declined during the period under review in respect of all the three size categories of banks. Thus the pattern of spread has been independent of size and bank group. In respect of small and medium banks, the spread has declined from 4.6 and 4.1 per cent to 3 per cent and 2.7 per cent, respectively. In the case of large banks, the spread was of a low order, fluctuating between
2.2 per cent and 3.1 per cent. The performance of these banks has been classified as poor, good and very good, if the RoA of a bank is less than 0.3 per cent, lies in the range of 0.3 to 0.8 per cent, and more than 0.8 per cent, respectively. Against these three classes of performance of banks, the share of credit to smallscale industries in total credit of those corresponding banks has been worked out and presented in Table 13. It may be seen from the table that the share of SSI in total non-food credit was high in the case of banks having poor and good performance, although the share has declined during the period of credit. In the case of banks whose performance has been very good, the share of
(Per cent)
| Year (end March) | Size Class | ||
|---|---|---|---|
| Small | Medium | Large | |
| 1992 | 15.5 | 19.3 | 28.2 |
| 1993 | 14.7 | 25.2 | 24.2 |
| 1994 | 15.8 | 26.5 | 24.1 |
| 1995 | 14.6 | 25.5 | 23.6 |
| 1996 | 13.6 | 22.3 | 22.9 |
| 1997 | 14.4 | 21.1 | 20.7 |
| 1998 | 14.1 | 19.9 | 19.0 |
| 1999 | 16.0 | 16.7 | 18.5 |
| 2000 | 15.8 | 17.4 | 17.9 |
| 2001 | 14.8 | 17.8 | 16.3 |
| 2002 | 14.0 | 17.4 | 13.3 |
| 2003 | 13.5 | 16.5 | 13.9 |
Note: Size classes are as defined earlier. Source: As in Table 2.
(Per cent)
| Year | SBIA | NB | FB | OSCB | ||||
|---|---|---|---|---|---|---|---|---|
| RoA | SP | RoA | SP | RoA | SP | RoA | SP | |
| 1992 | 0.30 | 4.46 | 0.26 | 2.90 | 1.93 | 4.91 | 0.48 | 3.88 |
| 1993 | 0.25 | 3.17 | -2.19 | 1.84 | 0.77 | 4.88 | 0.08 | 2.96 |
| 1994 | 0.24 | 2.95 | -2.23 | 2.10 | 1.87 | 4.98 | 0.21 | 3.06 |
| 1995 | 0.38 | 3.40 | 0.00 | 2.64 | 1.94 | 4.77 | 0.81 | 3.18 |
| 1996 | -0.18 | 3.57 | -0.54 | 2.88 | 1.49 | 3.92 | 0.91 | 3.37 |
| 1997 | 0.72 | 3.68 | 0.36 | 2.95 | 1.19 | 4.41 | 1.09 | 3.05 |
| 1998 | 1.03 | 3.55 | 0.57 | 2.82 | 0.42 | 4.17 | 1.00 | 2.56 |
| 1999 | 0.63 | 3.27 | 0.34 | 2.70 | 0.12 | 3.79 | 0.60 | 2.23 |
| 2000 | 0.83 | 3.09 | 0.42 | 2.64 | -0.34 | 3.74 | 0.82 | 2.27 |
| 2001 | 0.64 | 3.16 | 0.27 | 2.85 | -0.17 | 3.52 | 0.30 | 2.37 |
| 2002 | 0.95 | 3.00 | 0.64 | 2.71 | -0.29 | 2.80 | 0.78 | 2.13 |
| 2003 | 1.14 | 3.08 | 0.95 | 2.99 | 0.31 | 3.29 | 0.75 | 2.27 |
Notes: RoA-return on assets; SP-spread obtained as interest income net of interest paid on deposits as a percentage to total assets of the bank. Source: Derived from the data published by RBI (2003).
(Per cent)
| Year | Small | Medium | Large | |||
|---|---|---|---|---|---|---|
| RoA | SP | RoA | SP | RoA | SP | |
| 1992 | 1.19 | 4.58 | 0.79 | 4.05 | 0.38 | 3.02 |
| 1993 | 0.85 | 4.11 | –0.77 | 3.07 | –1.60 | 2.18 |
| 1994 | 0.90 | 4.20 | 0.66 | 3.24 | –1.89 | 2.25 |
| 1995 | 1.39 | 4.15 | 0.88 | 3.36 | 0.14 | 2.81 |
| 1996 | 1.00 | 3.68 | 0.65 | 3.42 | 0.08 | 3.08 |
| 1997 | 1.04 | 3.82 | 1.06 | 3.42 | 0.57 | 3.15 |
| 1998 | 0.34 | 3.54 | 1.31 | 3.16 | 0.76 | 2.93 |
| 1999 | 0.03 | 3.23 | 0.89 | 2.82 | 0.47 | 2.75 |
| 2000 | -0.23 | 3.16 | 1.05 | 2.87 | 0.57 | 2.71 |
| 2001 | -0.34 | 3.05 | 0.72 | 2.95 | 0.52 | 2.91 |
| 2002 | -0.26 | 2.44 | 1.11 | 2.72 | 0.76 | 2.69 |
| 2003 | 0.25 | 2.96 | 1.04 | 2.67 | 1.06 | 2.91 |
Notes: (1) Size Classes – small, medium and large, as defined earlier.
(2) RoA and SP as defined in Table 9. Source: Derived on the basis of the data published by RBI (2003).
SSI, although low compared to the other two classes, has increased from around 4 per cent in 1992 to 7.3 per cent in 1998 but fell in the subsequent period to 4.5 per cent in 2003. The decline in the share in total industry is steep in respect of banks having poor or good performance, while for those having a very good performance, the share increased and nearly doubled. Thus, the performance of the banks appeared to influence the credit extension to small-scale industry or even total industry.
VI Econometric Evidence
It is well recognised that the univariate cross-tabulation approach might not be well suited to address the interrelationships among the determinants of SSI lending and other bank financial parameters, since bank characteristics would be correlated with each other. To address this aspect and to substantiate the results under the univariate approach, a multivariate regression framework is employed to relate bank-level determinants of SSI lending to bank characteristics. The empirical strategy is based on the following panel data two-way fixed effects model:
yit =μ+αi +βt +∑γktxkt +εit
where, yit is the proportion of SSI-credit to total credit of the ith bank in the tth year; αi and βt are bank-specific and timespecific effects. The exogenous variables (xi) selected for explaining the share of SSI-credit are: (a) size of the bank (SIZE), expressed as log(assets); (b) the proportion of NPA arising from SSI-lending (SSINPA); (c) average return on assets (RoA); and
(d) capital to risk-weighted assets ratio (CRAR). To capture the interrelationship between SIZE and SSINPA on the overall lending to the SSI sector, we have added an interaction term. Except SIZE, all the other variables are used with a one-year lag. In order to ascertain the differential role in SSI lending, the model is estimated separately for public and private sector banks. As bankwise data on SSINPA is available only since 2001, the analysis is based on the data of 2001-04. Bank-wise data on various variables are obtained from various issues of Statistical Tables Relating to Banks in India and the Report on Trend and Progress of Banking in India.
Table 14 presents the estimated parameters of the model. We observe that time has a negative and statistically significant relation with the share of SSI lending, in particular for private banks. This has been well corroborated by the fact that Indian banks, irrespective of the ownership, have reduced their SSI lending in the recent past. For public sector banks, we found that big banks are more likely to curtail SSI lending. However, for private banks, it is the other way around. It seems that prior performance, as measured by the return on assets, of banks severely affects current lending to the SSI sector. For example, if banks perform well in the earlier period, it is more likely that they will not reduce their lending to SSI. This is more so for private banks. Whether the bank is in the public or private sector, a higher incidence of non-performing SSI loans harshly affects the credit flow to this sector. In the absence of any incentive schemes, lending inertia of commercial banks is much more prominent with respect to the SSI sector. Given the higher transaction and monitoring cost of the SSI loan portfolio, the problems get compounded. In addition, there is always a huge information gap between banks and the performance of SSI enterprises. From the view point of SSI enterprises, they face the problems of untimely repayment schedule from buyers, which aggravates the payment schedule of SSIs to banks. The interaction term also revealed some interesting insights. Large banks, with an overhang of sizeable SSINPA, are more likely to shrink their current SSI lending. These results do indicate that the declining share and quantum of loans to the SSI sector of commercial banks are largely associated with the movement of bad loans arising out of such advances.
VII Summary and Conclusions
The financial sector, in particular, the banking sector, experienced a series of reforms through restructuring and downward adjustment in interest rates, statutory prescriptions, etc. Besides, the credit delivery system to SSI sector was also examined by different committees, to suggest ways of enhancing the availability of credit to the sector. All these factors could also have affected credit expansion to the SSI sector.
Examining the credit disbursement of scheduled commercial banks to the SSI sector, it was observed that the share of SSI
(Per cent)
| Year | Poor RoA | Good RoA | Very Good RoA | |||
|---|---|---|---|---|---|---|
| (0.3 or Less)* | (0.3 to 0.8) | (More than 0.8) | ||||
| SSI NF | SSI ID | SSI NF | SSI ID | SSI NF | SSI ID | |
| 1992 | 12.4 | 32.6 | 13.2 | 38.9 | 4.1 | 9.5 |
| 1993 | 12.3 | 32.0 | 11.2 | 32.5 | 3.9 | 9.9 |
| 1994 | 14.1 | 34.9 | 9.8 | 29.3 | 4.0 | 8.4 |
| 1995 | 12.0 | 31.0 | 11.0 | 28.2 | 5.5 | 14.5 |
| 1996 | 11.3 | 27.0 | 10.1 | 25.4 | 5.7 | 14.2 |
| 1997 | 8.8 | 20.9 | 8.8 | 22.6 | 7.1 | 15.8 |
| 1998 | 5.4 | 15.0 | 9.2 | 25.6 | 7.3 | 15.9 |
| 1999 | 6.3 | 17.3 | 9.7 | 23.1 | 6.3 | 13.2 |
| 2000 | 6.1 | 15.2 | 7.8 | 20.1 | 6.1 | 14.1 |
| 2001 | 5.0 | 12.7 | 7.2 | 19.0 | 5.6 | 14.8 |
| 2002 | 6.7 | 15.8 | 5.3 | 16.7 | 5.7 | 17.0 |
| 2003 | 5.5 | 13.8 | 4.5 | 16.8 | 5.3 | 16.3 |
Notes: SSI NF – Per cent share of SSI in non-food credit. SSI ID – Per cent share of SSI in industry.
* Includes negative return also. Source: Derived based on data published by RBI (2003 and 2004).
| Parameters | Public Sector Banks | Private Banks |
|---|---|---|
| INTERCEPT | 1.611 | –0.776 |
| (7.963) | (2.024) | |
| Time effect, year=2003 | –0.631* | –0.297* |
| (0.098) | (0.072) | |
| Time effect, year= 2004 | –1.041 | –0.136* |
| (1.503) | (0.054) | |
| SIZE | –0.068* | 0.168* |
| (0.031) | (0.099) | |
| SSINPA t-1 | –0.109* | –0.071* |
| (0.053) | (0.032) | |
| RoA t-1 | 0.303 | 0.012* |
| (1.686) | (0.006) | |
| CRAR t-1 | 0.130 | 0.117 |
| (0.208) | (0.092) | |
| SIZExSSINPA t-1 | 0.051* | 0.005 |
| R2 | (0.023) 0.85 | (0.008) 0.94 |
| N | 81 | 87 |
Notes: Figures in bracket indicate standard errors. *: Significant at 5 per cent level.
sector in total bank credit and in credit to the total industry varied between 12.9 to 13.9 per cent and 24.7 to 30.3 per cent, respectively, during the period 1991-92 to 2001-02, which decreased thereafter to 8.1 per cent and 21.4 per cent in 2003-04, respectively. The growth in credit to the SSI sector fluctuated between 5.5 per cent and 19.8 per cent, except in 1994-95 (21.7 per cent growth) and 2002-03 (-3.6 per cent).
Considering the SSI sector and non-SSI sector of total industry, the growth rates in credit to the former are lower than those of the latter for all bank groups, with a few exceptions. Further, the growth rates did not give any clear idea about the progress of credit to the SSI sector by the different bank groups. However, the share of the SSI sector in non-food credit, in general, decreased during the period of the study for all bank groups. The foreign banks group held a low share, ranged between 1.4 and
2.4 per cent. A similar pattern was observed in respect of the share of the SSI sector in total industry.
Viewing banks according to their size by total assets, the growth rates in credit to the SSI sector recorded low or negative rates during 2001 to 2003, as against high growth rates in the earlier period for small sized banks. For the other two size classes of banks, there was no pattern. However, the share of the SSI sector in total industry decreased for medium and large banks, and fluctuated in a narrow range of 13.5 to 16 per cent for small banks.
Looking at specific performance indicators, the RoA fluctuated during the period of the study in respect of all bank groups. The spread, on the other hand, registered a decline in respect of the SBIA group, foreign banks and OSCBs, while for nationalised banks, it fluctuated between 2.1 and 3 per cent, except for 1993. A similar pattern of fluctuating RoA and decline in spread have been observed when banks are grouped according to their size.
Based on the RoA for the banks, the share of credit to the SSI sector in total industry and non-food credit has been examined. The share of SSI sector in industry significantly decreased in respect of banks having a poor (≤0.3 per cent) or good (0.3 to
0.8 per cent) RoA, while for very good performing banks (RoA more than 0.8 per cent), the share increased during the period of the study. Similar is the case with the SSI share in total nonfood credit.
The definition and coverage of the SSI sector is being revised from time to time by excluding more and more commodities from the reserved SSI list and also through liberalising the credit delivery mechanism of the banking industry. Despite increase in the coverage of the SSI sector, its share in bank credit decreased during the period of study and experienced fluctuating growth. Of late, in the post-2000 period, the growth in credit to the SSI sector has decreased compared to that in the earlier period. It is of concern whether the banks are meeting the working capital requirements of the small-scale industry. The issue of falling credit to SSI during the post-reform period also needs to be seen against the high incidence of NPAs in SSI lending. In the absence of any specific quantitative restriction within the priority sector, commercial banks will try to play safe and divert funds to other sectors that yield higher returns.
Annex: Concepts and Definitions
Total bank credit as reported through Basic Statistical Returns has been adopted in the study. These data may differ from the total credit reported in other returns, like Section 42 (2), and published elsewhere. Accordingly, the growth rates worked out for non-food credit, given in Table 1, may differ from the growth rates worked out from other data sources.
The “industry” sector covers manufacturing activity in both the public and private sectors, excluding “construction” and “mining and quarrying” activities.
The small-scale industry sector has been defined to include industries categorised under (a) small-scale industrial undertakings, (b) ancillary industrial undertakings (ANC), (c) exportoriented units (EOU), (d) tiny enterprises (TINY), (e) small-scale service enterprises (SSSEs), (f) small-scale service business (industry-related) enterprises (SSSBEs), (g) artisans, villages and cottage industries, and (h) women entrepreneurs’ enterprises. The definition of a SSI sector unit is broadly based on the criterion of original value of plant and machinery, which is revised periodically.
The RoA is available in the published annual accounts of banks. The ratio is defined as net profit as a percentage to average assets. It is a profitability indicator. Another indicator, the cost of deposits, defined as the ratio of the interest paid on deposits to total deposits has been worked out, based on the balance sheet and profit and loss account data.
The “spread” is defined as the net interest margin as a percentage to total assets. The net interest margin has been worked out as total interest earned less total interest paid. This ratio is arrived at from the data of the balance sheet and income and expenditure account.
m Email: ADas@rbi.org.in ksrrao@rabi.org.in
Notes
1 The investment limit of Rs 1 crore has been enhanced to Rs 5 crore by the GoI, in respect of certain specified items under hosiery and hand tools.
2 In November 2004, the government of India, de-reserved 85 articles from the SSI sector list, while hiking the investment limit to Rs 5 crore for 7 SSI items. As a result there are 570 articles in the reserved list of 22 categories in the SSI sector (Business Standard, November 30, 2004).
3 These data are collected through a return known as BSR 1, from all branches of commercial banks. Scheduled commercial banks’ credit has been referred to as “bank credit” in the rest of the paper. The outstanding amount of credit relate to all borrowal accounts.
4 RBI, Report on Currency and Finance, 1997-98, Vol I. 5 The second census covered only the registered SSI sector.
References
Development Commissioner (1992): Report on the Second All-India Census of Small-Scale Industries, 1987-88, Government of India, New Delhi.
