CHAPTER VIII

CREDIT DEPOSIT RATIO AND PRIORITY SECTOR LENDING

8,l Introduction
The flow of credit is one of the key instruments to regulate various economic activities. The credit is deployed by commercial banks based on the deposits mobilised from the public after making allowances for statutory requirements prescribed
by RBI from time to time. In order to maximise the credit flow and to ensure better

deployment of credit, a monetary tool known as Credit Deposit Ratio (CDR) was introduced by RBI. The CDR has become more important after the nationalisation of
banks to assess the credit deployment by commercial banks to benefit the economy in

general and the targeted group in particular. Tk CDR expressed in terms of percentage reflects the trends of the flow of credit during each period. Priority Sector Lending

(PSL) normally depends on the CCDR, that is, higher the CDR, higher will be the flow
towards the PSL. The flow towards PSL is decided by the flow of net bank credit which in turn depends on CDR. As per the RBI stipulation, atleast 60 per cent of the CDR

should be achieved by Commercial banks with 40 per cent of the net bank credit to
priority sector. The quantum deployment o f PSL in turn depends on the net bank credit

which in turn depends upon the CDR. This chapter attempts to analyse the vital
relationship between CDR and PSL in the context of Union Territory of Pondicheny.

8.2 Growth of Deposits and Advances A India H

Over the years, deposits and advances have gown' enormously in India. For i~~stancebetween June, 1969 to March 1998, the deposits have grown from Rs.4.646 to 6,05,410 crores in 1998 implying an increase of 130.30 times. The credit

disbursed has increased from Rs.3599 crores to Rs.3.24,079 crores for the corresponding
period, indicating an increase of 90.04 times. However, CDR which was 77.5 per cent

in 1969 has come down to 53.5 per cent in March'98. The growth of deposits to the extent of 130.30 times and growth of advance to the extent of 90.04 times indicate the reduced credit flow from banks which widens the gap between the deployment of credit
and mobilisation of deposits. When the CDR is at a lower ebb, the weaker sections will

be the most affected along with other borrowers. The proportion of bank deposit forms a very higher percentage to total money in circulation. Hence, it is of paramount importance to ensure the flow of adequate credit. After the financial sector reform measures were introduced in 1991, there was decline in CDR from 60.8 per cent in March'90 to 60.6 per cent in March'91 and further down to 55.4 per cent in March592. The CDR was of 55.1 per cent in March'97 and further down to 53.5 per cent in March' 98 which is well below the stipulated target of 60 per cent..

8.3 Credit Deposit Ratio in the Union Territory of Pondicherry In the Union Territory of Pondicheny, the CDR mechanism was operating

well even before bank nationalisation in July 1969. An analysis of deposits and

'~eserve B& of Mia.,Mumbai - BankingStatistics - Basic Statistical Returns Volume .25, March, 1996,

advances made between 1962-1968 show that the deposits had gone up from Rs.250

lakh to Rs.501 lakhs and the corresponding flow of advances were Rs.207 lakhs and
Rs.327 lakhs respectively. Between 1962 and 1968. the CDR had never come down

below 60 per cent. The bank nationalisation has facilitated the opening of more number
of bank branches in various nook and comers of the Union Territory of Pondicherry,

thereby making available the banking facilities at the door step of the common man. As against 15,000 population per bank branch in 1969, it was 11.000 population per bank branch in 1996. The deposits mobilised, credit advanced and the CDR from 1969 are given in Table 8.1.

As may be seen from Table 8.1, bank deposits on the aftermath of bank nationalisation, has gone up from a mere Rs.552 lakhs in 1969 to Rs.96,661 lakhs in March, 98 indicating an increase of 175.11 times. The credit flow for the same period has gone up from Rs.480 lakhs to Rs.34,733 lakhs indicating an increase of 72.36 times. From this analysis, it can be inferred that though the deposits mobilised and advances made during the last 29 years had gone up, the percentage increase in the growth of deposits and advances was not at the same rate. This clearly brings out the fact that there is a widening gap between the growth of deposits and advances in the Union Territory of Pondicheny. Due to this gap, the deployment of credit was affected in the Union Territory of Pondicherry. The credit deployment had exceeded in 1970 and 1971 indicating CDR of 104.52 per cent and 100.30 per cent respectively. CDR had never come down to less than 60 per cent till 1982 ( except the year 1980 ). From 1983, CDR

started declining gradually. The CDR had come down to 43.58 per cent in 1986.

Table 8.1: CREDIT DEPOSIT RATIO IN THE UNION TERRITORY OF PONDICHEKRY

(Rs, in Eakhs)
S1.

No.

Year

Deposits
(3)

Advances
(4)

Credit Deposit Ratio in (Percentage) (5)

Source: [a] Reserve Bank of India, bank in^ Statistics 1972 Mumbai, PP 99-122

1995

- Basic

Stat~sticalReturns,

[b] Reserve Bank of India, Statistical Tables relatine to Banks in India 1996 - 97, Mumbai pp 48 - 62.
[c] Reserve Bank of India, Banking Statistics - Basic Statistical Returns (Vol-26) March 1997, Murnbai, pp26-36.

[dl Reserve Bank of India, Bankine. Statistics- Omiterlv H n o t , Various Years, Mumbai adus

[el Planning and Research Deparbnent, Government of Pondicherry, Bankine Indicators,

Pondicherry, May 1990.

[fl Lead Bask (Indian Bank) Qiitdct

Union Tenitom of Pondicherrv,

Credit Plan

/ Annual Credit Plan 1980

1997-98

During 1987 and 1990. the CDR was fluctuating between 50.88 to 55.73 per cent and thereafter a steady decelaration has started culminating in an all time low CDR of 39.01 per cent in March 1997 and and 35.93 in March 1998. The CDR has all along been March, 90 (except in 1986). whereas maintained at the level of more than 50 per cent t~ll the ratio has come down below 50 per cent, after the structural reforms are introduced in the financial sector in 1991. This has affected the credit flow.
It may not be out of context to mention that in the Regional Consultative

Committee (RCC) meeting of nationalised banks for southern region held in June, 1993
at Bangalore, the issue of low CDR pertaining to the Union Territory of Pondicheny

was discussed and a decision was taken to appoint a committee2to go into the problems. This committee has projected a CDR of 65 per cent to be achieved by March, 1997. This has not been achieved till date . Though the decline in CDR was an All Ind~a phenomenon affecting various States, the decline was more steep in the Union Territory of Pondicherry.

8.4

Sectoral Flow of Credit Under Priority Sector Lending (All India)

From the sectoral flow of credit under PSL for All India as indicated in Table 8.2 it can be seen that in 1970, Agriculture sector had received 39.88 per cent of priority sector credit and this has gone up to a maximum of 43.1 1 in 1981. Till 1990, the

'Indian Bank ( Lead Bank ), Pondi~hqw Report of the committee on Credit l R a t i inct 1994, Madras, pp.53-55, o

Table 8.2: SECTORAL OF CREDIT TOWARDS PRIORITY SECTOR LENDING - ALL FLOW INDIA (Rs. in Crores
SI. No
(1) Year Agriculture to ~01.9 (4)

Sedor
(5)

Percentage
to co1.9

(2)

(3)

(6)

Other Priority Sector Lending (7)

Percentage to co1.9

(8)

Total Priority Sector Lend~ng (9)

Source:[a] Reserve Bank of India - Report on Currency and Finance, 1969-70 - 1988-89 and Annual Reports of Reserve Bank of India, various years,Mumbai.
[b] Reserve Bank of Ind~a, Banking Statistics I972 - 1995 - Basic Statistical Returns, Mumbai,

[c] Reserve Bank of India, Statistical Tabla relating to Banks in India 1996 - 97, Mumbai.

[dl Reserve Bank of India, Baking Statistics - Basic Statistical Returns, Vol-26 March 1997, Mumbai .

[el Reserve Bank of India, Bankioe Statistics - Ouarterl~ Handouts various years, Mumbai

flow ranged from 41 to 43 per cent of total priority sector credit, when the financial sector reforms were pervading the commercial banks, downward trend has started from 1994 onwards. By March 1998 the credit flow towards agriculture sector was only 35.04 per cent. In the case of small industries. the flow was 46.76 per cent in 1970. Flow was below 40 per cent from 1978 to 1990. Thereafter it has picked up and had reached a level of 43.72 per cent in March,1998. As regards other priority sectors (services sector) it was 13.36 per cent in 1970 and increased to 19.43 per cent in 1980. 20.56 per cent in 1990 and 21.23 per cent in 1998.

8.5

Inter sectoral Flow of Credit out of Net Bank Credit

Table 8.3 indicates that there was a steady percentage increase of Net

bank credit towards agricultural sector from 1970 till 1987. The deceleration in

percentage flow has started from 1988 and continued till MarchJ998. The financial sector reform has accentuated the process of downward trend. As against 18 per cent flow of net bank credit towards agriculture, it was only 11.73 per cent in 1998. Small scale industries did not face much problem as that of agriculture sector. From 10.53 percentage in 1970, it was 14.64 per cent in 1998. Other PSL indicates that from 3.01

lw per cent in 1970, the fo has increased to 9.67 per cent in 1987. In 1998, the flow was
7,11 per cent only.

TABLE 8.3: SECTORAL FLOW CREDIT O T OF NET BANK OF U CREDIT ALLINDIA (Rs ~n Crores)
SI.No.
yep,. Agriculture

Percentage Small Scale Percentage to co1.9 Sect-or to col.9 (4)

Other Priority Sector Lendrng

Percentage to co1.9

Net Bank Credit

(1)

(2)

(3)

(5)

(6)

(7)

(8)

(9)

Source: [a] Reserve Bank of India - Report on Currency and Fmance, 1969-70 - 1988-89 and Annual Reports of Reserve Bank of India, various years,Mumbai.
[b] Reserve

Bank of India, Banking Statist~cs 1972

1995

Basic Stattstical Returns,

97,

Mumbsu,
[c] Reserve

Bank of India, Statstical Tables relatinP to Banks in India 1996 -

Murnbal.
[dl Reserve Bank of India -B&P

Murnba .

Statistics Basic Statutical ReturnsAVol.26 March 1997,

[el Reserve Bank of W , Banking Statisbcs - Ouarterly Handouts various years, Mumbal a

8.6

Trends in Priority Sector Lending in the Union Territory of Pondieherry

The advances of scheduled commercial banks towards PSL in the Union Temtory of Pondicherry are available only from 1972. The advances of Commercial

banks under various broad sectors of priority sector are indicated in Table 8.4.

Table 8 4 indicates that agricultural sector had received 5 1.Q1 per cent of priority sector credlt from 1972 and increased to a maximum of 65 63 per cent in 1982

Downward trend has started since then. In 1991: the flow was only 43.09 per cent and this has come down to 38.28 per cent in 1994 In 1997, it was 45 42 per cent. In respect

of small scale sector, the flow was 45.17 per cent in 1972. The sectoral flow had started
its decline since 1973 year by year. During 1982, the percentage was 27.54. Dunng the nineties, the flow has started increasing with 42.38 per cent in 1992 and 41.52 per cent in 1994. Thereafter, decline has started reaching a low of 33.67 per cent in 1997. As regards other priority sector, it may be seen that from a mere 3.88 per cent in 1972 it has reached a maximum of 7.47 per cent in 1981. In 1983, the flow w s 15.34 per cent whlch a increased to19.51 per cent in 1984 . The percentage flow w s hovering around a a minimum of 16 per cent to a maximum of 18.52 till 1991. From 1993, the percentage

flow was in the vicinity of 20 to 21 per cent. In 1997, the percentage flow was 20.90.

Table 8.4: SECTORAL FLOW OF ADVANCES FROM COMMERCIAL BANKS UNDER PRIORITY SECTOR LENDING, PONDICHERRY
$1ye,,

No

Agriculture Percentage Small Scale Percentage to c01.(9) Sector to co1.(9)

Other Sector

Percentage
'0

Tatal Priority ~0149) Seetor

Source: [a] Reserve Bank af India, Banking Statistics 1972 - 1995 - Basic Stattstical Returns, Mumbai, PP 99-122 [b] Reserve Bank of India, Statistical Tables relating to Banks in India 1996 - 97, Mumbal pp 48 62. [c] Reserve Bank of India, l V 0 1 . 2 6 , March 1997, Mwnbai, pp26-36. [dl Reserve Bank of India, B d h p Statistics - Quarterly Handouts, Various Years, Mumba~ [el Planning and Research Deparbnmt, Government of Parrdicheny, Banking; Indicators, - ~ondicherry, May 1990. [fl Lead Bank (Indian Bank) District Credit Plan / Gnnual Credit Plan 1980 - 1997-98 Union Te;rritory of Pondicherrv.

8.7 Sectoral Flow of Advances Out of Net Bank Credit in the Union Territory of
Pondicherry The sectoral flow of advances out of the net bank credit in the Union

Territory of Pondicherry from 1972 to 1997 is given in Table 8.5. The flow had been increasing steadily from year to year (except in 1977 and 1979) from a mere 10.41 per cent in 1972 to a maximum of 34.17 per cent in 1983. Thereafter there was decline in 1984. In 1985 and 1986, flow towards agricultural sector had picked up. Since 1987. the decline has started and had come to a low level of 17.02 per cent in March.92. From 1991 to 1997, the percentage flow was in the range of 15 per cent to 17 per cent only. In the case of small scale sector from a mere 9.22 per cent in 1972, the flow has gone up
and reached a maximum of 20.70 per cent in 1980 and 22.74 per cent in 1983. From

1984 to 1990, the credit flow was between 13 per cent and 19 per cent. In March, 1997 it was only 12.07 per cent. The percentage of credit advanced under other priority sector

was a mere 0.79 in 1972 and increased to a maximum af 3.82 in 1980. During 1983, the

flow was 10.31 per cent. This trend was almost maintained till 1986. From 1987 to
1997, the flow had been hovering around 6.97 per cent to 8.76 per cent.

Table 8 5 SECTORAL FLOW OF ADVANCES OUT OF THE NET BANK .: CREDIT OF COMMERCIAL BANKS, PONDICHERRY
Other Net Bank Credit

s,.No

Year Agriculture Percentage

to co1.(9)

Small Scale

Sector

Percentage to CO!.(Y)

Percentage
to Co1.(9)

Source: [a] Reserve Bank of India, Banking Statist~cs 1972 - 1995 - Basic Statistical Returns, Mumbai, PP 99-122 [b] Reserve Bank of India, Stat~stical Tables relating to Banks in India 1996 - 97, Mumbai pp 48 62. [cl Reserve Bank of India, Bankinrr Statistics - Basic Statistical Retuns. Vol.26, March 1997, -Mumbai, pp26-36. (dl Reserve Bank of India, Banking Statistics - QuMerlv Handouts, Various Years, Mumbal [el Planning and Research Departmat, Government of Pondicheny, Bankine Indicators, ?ondichem, May 1990% [fl Lead Baak (Indian Bank) District W i t P1.m 1 Annual Credit Plan 1980 -1997-98

26

1997

5278 I8

16 28

3912 94

12 07

2429 03

749

32421

Union T e n i of P o ~ d i c h m ~

8.8 Recovery Performance of Banks in the Union Territory of Pondicherry

Recovery is a major problem encountered by commercial banks in general. After the structural reforms are implemented in financial sector, particularly in

banks, a new dimension has been added and the advancing of fkther credit is linked to
recovery of performance of banks. The prudential norms has driven the banks to a tight corner. The performance of banks in terms of profitability depends on the recovery performance. In this context, it was attempted to find out the of recovery performance

made by commercial banks in the Union Territory of Pondicherry.

Table 8.6: RECOVERY PERFORMANCE UNDER PRIORITY SECTOR ADVANCES, PONDICHERRY

Year

Recovery (in Per Cent)

Source: Indian Bank (Lead Bank), - h u a l Credit Plans and Agenda Pagers of the State Level Bankers' Committee, Pondicheny, Various Years, Pondicherry.

From Table 8.6. it may be seen that the recovery performance of banks under PSL in 1987 was 38.27 per cent. This performance has improved to 53.97 per cent in 1991 and 56.02 per cent in 1992. It has come down to 48.86 per cent during 1993. Improvement has taken place in 1994 to 58 per cent. In 1995 and 1996 it was 53 per cent and 60 per cent respectively. During 1997 it has come down to 54 per cent and to 55.21 in 1998. This shows that the recovery position of advances is not as alarming as it was portrayed by various commercial banks in the Union Territory of Pondicherry The sector-wise recovery performance under priority sector from 1995 is given in Table 8.7:
Table 8.7: RECOVERY PERFORMANCE (SECTOR-WISE), PONDICHERRY

(in Per Cent)

1995 1996 1997 1998 (3) 14) (5) (6) 65 64 64 63 41 53 41 48 42 60 48 50 53 60 54 55 TOTAL Source: Indian Bank (Lead Bank), Agenda papers of the 58" meeting of State Level Bankers' Committee, Pondicherry, 1999.

SI.No. Name of the Sector (1) (2) 1. Primary 2. Secondary 3. Tertiary (Services)

It can be seen from Table 8.7, that as against the overall recovery performance of 53 per cent in 1995, it was 55 per cent in 1998. Agriculture and allied activities throughout 1995-98 has witnessed a recovery performance of more than 60 per cent. Though little less than half of the loans were recovered under industries sector, more efforts are required on the part of banks and concerned implementing agencies to
go in for all out efforts to recover the amount and try to achieve a recovery performance

of 90 per cent if not 100 per cent. Similar is the position in respect of services sector.
Now joint recovery camp is attempted by commercial banks in coordination with the concerned implementing agencies like DIC, DRDA and PADCO which may likely to yield a positive impact in the recovery fkont.