Capital shortfall to hurt growth of the Indian banking sector: Assocham Study

The credit portfolio of banking sector is projected to expand five-fold from Rs 3,497,000 crore in 2010 to Rs 16,418,100 crore by 2020 at a compound annual growth rate of nearly 17 per cent, according to a study released in June 2011, by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) and global consulting firm Ernst & Young.

This will require scaling up of capital from Rs 430,000 crore to Rs 2,009,500 crore or Rs 157,900 crore annually. “But considering the implication of government ownership, banks may face 50 to 85 per cent shortfall in capital supply,” said the study titled Trillion Dollar Economy – Opportunities and Challenges for Banks. “This will likely seriously hamper the growth of banks and the economy.”

At present, India has the second highest number of financially excluded households in the world. About 40 per cent of the country’s population has bank accounts and only 10 per cent have any kind of life insurance cover while a meager 0.6 per cent has non-life insurance cover.

There are six lakh un-banked villages and only 38 per cent of all bank branches are in rural areas. Although efforts have been made to expand the branch network from 8,700 at the time of nationalisation in 1969 to 87,000 now, only 32,000 branches are present in rural India.

Agriculture – contributing 14.6 per cent to the national GDP – requires substantial investments, especially as it supports the livelihood of 89 million rural farm households. Moreover, 46 million rural farm households are excluded from the financial services net.

Banks are experimenting with various incentives for furthering financial inclusion but have not been able to make a significant impact, given the magnitude of the problem and difficulties in reaching the excluded population due to lack of rural infrastructure, customer illiteracy and the widespread inability of customers to save. Financial inclusion has been taken up as a policy initiative but banks are still working toward a viable business model

India thus needs to follow a two-pronged approach. One, boost the agriculture sector through a more engaged contract farming that will likely benefit farmers through technology transfer, capital inflow and creation of assured markets for crop production.

Two, focus on leveraging non-banking financial company sector for asset creation and retail loans due to the reach and capabilities they offer in asset financing.

According to ASSOCHAM, the challenges facing the Indian banking sector are primarily increasing coverage, supporting large credit requirements of rapidly growing economy and sourcing adequate levels of capital to fund growth. The challenge for policymakers thus lies in making credit sustainable and aligning it with the country’s social objectives.

At these levels of projection, per capita bank credit will increase from 742 dollars at present to 2,630 dollars by 2020. However, it will still be half of where China and Brazil are today – at 4,971 dollars and 3,198 dollars respectively.

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