CHAPTER V DISTRICT CREDIT PLANS AND FINANCING OF PRIORITY SECTORS. Consequent to the introduction of Lead Bank Scheme, commercial banks

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1 CHAPTER V DISTRICT CREDIT PLANS AND FINANCING OF PRIORITY SECTORS Consequent to the introduction of Lead Bank Scheme, commercial banks are assuming the lead role in co-ordinating the functions of all developmental agencies, especially credit institutions. Initially the Lead Bank Scheme was mainly used to assist in the branch expansion programme. Gradually, its role has been expanded to monitor the entire lending to priority sector with district as the unit. Lead Bank prepares the District Credit Plans dovetailing the projects made by Government in district development plans and monitor the implementation of various schemes. The objective of District Credit Plans formulated under the Lead Bank Scheme is to guide the credit institutions to deploy their credit in such a way that they will have the maximum impact on the development of the district. It constitutes the framework for credit extension in the district under viable banking schemes, which are expected to constitute the all-round and integrated development of the district economy and the reduction of regional imbalances.

2 The Credit Plan, mainly seeks to indicate the scope for the development of various types of economic activities in a given time schedule with an emphasis on increasing opportunities for the weaker sections to participate in the process of development. District Credit Plans thus ensure adequate and timely flow of credit to the priority and neglected sectors in the district. It gives the break-up of credit outlay sector-wise and bank-wise. The District Credit Plans cover only the priority sectors and are grouped into three: agriculture, SSI and tertiary sectors. Tertiary sector includes all the items in the priority sectors other than agriculture and SSI. The DCP exercise is helpful in ensuring proper allocation of credit to different sectors according to plan priorities. In this chapter, District Credit Plans of the last decade, i.e., from to are analysed sector-wise, bank group-wise and district-wise. Sector-wise Performance The sector-wise performance under the District Credit Plans to for the State as a whole is set out in table 5.1. In the agricultural sector, allocation that stood at Rs. 68,596 lakhs in had increased to Rs. 2,42,389 lakhs in and the achievement had increased from Rs. 62,299 lakhs to Rs. 2,90,664 lakhs, registering a compound growth rate of per cent. In the SSI sector, allocation increased from Rs. 15,934 lakhs to Rs. 1,16,274 lakhs between and The disbursement recorded an

3 increase from Rs. 17,176 lakhs to Rs. 1,27,544 lakhs and the compound growth rate is per cent. Table 5.1 Sector-Wise Performance under DCPs (Amount in Rs. lakhs, performance in percentage) Agriculture sector SSI sector Tertiary sector Year ending March Target Achievement Performance Target Achievement Performance Target Achievement Performance In the tertiary sector, the allocation increased from Rs. 37,539 lakhs to Rs. 2,90,837 lakhs and the achievement from Rs. 34,428 lakhs to Rs. 306,394 lakhs during the reference period. The compound growth rate of achievement is per cent.

4 The performance score recorded in the SSI sector was above hundred per cent throughout the reference period and the agricultural sector performance was above hundred per cent from onwards. But the tertiary sector failed in achieving the target in and from to The sector-wise allocation and achievement for the State as a whole during the reference period are shown in table 5.2. As per the table, targeted credit for agriculture to the total was 56 per cent in and by it has reduced to 37 per cent. In the SSI sector, it varied between 13 and 19 per cent and in the tertiary sector the variation was from 28 to 45 per cent during the reference period. In the agricultural sector, the percentage of achievement is less than the allocation in five Credit Plans, i.e. from to and It is also inferred that in the SSI sector, the percentage of achievement has exceeded or reached the allocation throughout the reference period. For the tertiary sector, the percentage of achievement is higher than the allocation only in the Credit Plans of and In order to ascertain the consistency in fund allocation and achievement in lending to various sectors, the co-efficient of range for allocation and achievement were calculated and also shown in table 5.2. There is consistency in the allocation of funds in SSI sector compared to agriculture and tertiary sectors. But consistency in achievement is more in agriculture sector than in SSI and tertiary sectors.

5 Table 5.2 Sector-Wise Allocation and Achievement in Percentage Agriculture SSI Tertiary Total Year Allocation Achievement Allocation Achievement Allocation Achievement Allocation Achievement Co-efficient of range In order to know whether there is any significant difference between sectoral allocation and achievement percentages, Wilcoxon signed rank test is used. The following null hypotheses were framed for this purpose. H 4. There is no significant difference between allocation and achievement percentages in the agricultural sector. H 5. There is no significant difference between allocation and achievement percentages in the SSI sector.

6 H 6. There is no significant difference between allocation and achievement percentages in the tertiary sector. Table 5.3 Sectoral Allocation and Achievement Percentages: Wilcoxon Signed Rank Test (Level of significance 0.05) Details Calculated value (Z) Table value (Z) Result 1. Agriculture Sector Accept H 4 2. SSI Sector Reject H 5 3. Tertiary Sector Reject H 6 Source: Calculated from table 5.2 In order to test the hypotheses, Z values were calculated sector-wise and are given in table 5.3. From the table, it is inferred that the calculated value of Z for agriculture sector is less than the table values at 0.05 level of significance. Hence the hypothesis H 4 is accepted. But in the SSI and tertiary sectors, the calculated values are greater than the table values and hence the hypotheses H 5 and H 6 are rejected. The test result indicates that there is no significant difference between allocation and achievement percentages in the agriculture sector. But in the SSI and tertiary sectors, there exist significant difference between allocation and achievement percentages. Sector-wise Variations in Targets A comparison of the targets with the previous years achievement for different sectors is shown in table 5.4.

7 Table 5.4 Sector-Wise Variations in Targets to Previous Years Achievement Year Percentage of variation in targets to previous years achievement Agriculture sector Small-scale sector Tertiary sector According to the table, in the agriculture sector, the targeted credit is less than the previous year s achievement in and in the SSI sector the same tendency is noticed between and But in the tertiary sector throughout the reference period the target is more than the previous years achievement. Bank Group-wise Performance The performance of different bank groups under Credit Plans is also analysed. Table 5.5 sets out the percentage share of different bank groups in priority sector disbursement through DCPs from to

8 Table 5.5 Bank Group-Wise Share of Priority Sector Advances under DCPs Share of priority sector advances in per cent Year ending March State bank group Nationalised banks Other scheduled commercial banks Total The share of commercial banks in the total priority sector lending through DCPs was per cent in and it has increased to per cent in and then declined to by The share of state bank group increased from to per cent and of other scheduled commercial banks from to per cent. The share of nationalised banks varied between 18.11to during the period. The bank-wise target and achievement for different bank groups are shown in table 5.6. For the state bank group, the targeted credit recorded an increase from Rs. 13,291 lakhs in to Rs. 89,338 lakhs in The achievement has increased from Rs. 13,558 lakhs to Rs. 142,145 lakhs and the

9 compound growth rate was per cent. Throughout the reference period, the performance score of the state bank group was more than hundred per cent. Table 5.6 Bank Group-Wise Performance under DCPs (Amount in lakhs) State bank group Nationalised banks Other scheduled commercial banks Achievement Achievement Achievement Year ending March Target Amount Per cent Target Amount Per cent Target Amount Per cent The targeted credit of nationalised banks increased from Rs. 24,394 lakhs to Rs. 1,31,575 lakhs and that of achievement from Rs. 24,600 lakhs to Rs. 1,55,055 lakhs between and The compound growth rate achievement was per cent. They were able to reach the target in all the years except in

10 Throughout the reference period, the performances of other scheduled commercial banks were well above the target. Their targeted credit has recorded an increase from Rs. 11,851 lakhs to Rs. 97,942 lakhs. The disbursement increased to Rs. 1,15,592 lakhs from Rs. 14,141 lakhs during the reference period recording a compound growth rate of per cent. Thus the analysis revealed that the commercial banks have recorded a sterling performance during the reference period. Sector-wise Performance of Different Bank Groups The performance score of different bank groups in lending to different sectors as per Credit Plans are shown in table 5.7. In the agricultural sector, from onwards the entire bank groups have recorded a performance score of above hundred per cent except the other scheduled commercial banks in In the SSI sector, state bank group achieved the target only in four District Credit Plans, i.e., in , , and The nationalised banks achieved the target in all the years except in and The other scheduled commercial banks were able to cover the targets for all the Credit Plans under study. In the tertiary sector, the state bank group had met the target in seven Credit Plans; the nationalised banks and the other scheduled commercial banks in five Credit Plans.

11 Table 5.7 Year ending March Table 5.7 Sector-wise Performance Score of Different Bank Groups (In percentage) Agriculture sector SSI sector Tertiary sector Total SB group NBs OSCBs SB group NBs OSCBs SB group NBs OSCBs SB group NBs OSCBs In the total priority sector disbursement, the performance of all the bank groups are above hundred per cent, except nationalised banks in , for which the performance score was very closer to the target. The researcher has applied the Kruskal-Wallis one-way analysis of variance by ranks to analyse whether there is any significant difference in the performance of different bank groups in lending to various sectors. For this purpose, the following null hypotheses were framed.

12 H 7. The performance of different bank groups in lending to the agricultural sector does not differ significantly. H 8. The performance of different bank groups in lending to the SSI sector does not differ significantly. H 9. The performance of different bank groups in lending to the tertiary sector does not differ significantly. H 10. The performance of different bank groups in lending to the total priority sector does not differ significantly. In order to test the hypotheses, H values were calculated sector-wise and are given in table 5.8. From the table, it is inferred that, as the calculated values of H for agriculture and SSI sectors are greater than the table values of χ 2 at 5 per cent level of significance, H 7 and H 8 are rejected. But in the tertiary and total priority sectors, the calculated values are less than the table values and hence the hypotheses H 9 and H 10 are accepted. Table 5.8 Bank Group -Wise Performance: Kruskal-Wallis Test (Level of significance 0.05) Details Calculated value H Table value χ 2 Result 1. Agriculture Sector Reject H 7 2. SSI Sector Reject H 8 3. Tertiary Sector Accept H 9 4. Total priority sector Accept H 10

13 Source: Calculated from table 5.7 The result of the Kruskal-Wallis test indicates that the performance of different bank groups differs significantly in lending to agriculture and SSI sectors and there is no significant difference in lending to tertiary and total priority sectors. Bank Group-Wise Variations in Targets A comparison of the targets with the previous years achievements for different bank groups is shown in table 5.9. The targeted credit was less than the previous years achievement for the state bank group in six Credit Plans, for the nationalised banks in five Credit Plans, and for the other scheduled commercial banks in four Credit Plans. The analysis exposed that the targets are not fixed on the basis of previous years achievements. If allocations were based on previous years performance, it would have made the District Credit Plans more meaningful. There should be proper alignment between the two in the aggregates and also sectorally. Table 5.9 Bank Group-Wise Variations in Targets to Previous Years Achievement Year ending March Variation in targets to previous years achievement in percentage State bank Group Nationalised banks Other scheduled commercial banks

14 Split up of Priority Sector Advances The split up of total priority sector advances of commercial banks are shown in table Direct advances are the advances disbursed through branches under the District Credit Plans. All other contributions such as contributions to RRBs for the purpose of on lending, subscription to bonds issued by NABARD, SIDBI, NSIC etc. are included in indirect advances. The direct advances of state bank group varied between 6.55 and per cent and of nationalised banks between and per cent. The direct advances of other scheduled commercial banks were per cent in and increased to per cent by Table 5.10 Year ending March Priority Sector Advances of Different Bank Groups in Kerala Priority sector advances in percentage Other scheduled State bank group Nationalised banks commercial banks Direct Indirect Total Direct Indirect Total Direct Indirect Total

15 Direct advances are actually received by the beneficiaries from the branches. The analysis revealed that only a small share of priority sector credit is going to the beneficiaries directly and the short fall of 40 per cent target are rerouted into the schemes announced by the Government as contribution to RIDF, SIDBI, RRBs etc. at the corporate level. This indicates that the lending policy of the banks in the field of priority sectors has not been up to the mark. The state bank group was unable to achieve the PSL target of 40 per cent in , and to , i.e. in five years. It is encouraging that the nationalised banks achieved the PSL target fully well during the reference period. But the other scheduled commercial banks met their target only in three years, i.e , and Thus the hypothesis H 11, that is, all the bank groups have achieved the PSL target of 40 per cent of NBC as set out by the RBI, is rejected. Achievement of National Targets by the Banking Industry In the priority sector lending, sub-targets are fixed for agriculture, weaker sections and DRI advances. The target for agricultural advances is fixed as 18 per

16 cent of net bank credit, for weaker sections as 10 per cent of net bank credit and that of DRI advances as one per cent of the net bank credit of the previous year. An analysis is made to find out whether the banks in the State have achieved the prescribed targets between and Table 5.11 exposes the achievement of national targets by the commercial banks in the State. None of the bank groups had met the national target for agriculture during the reference period except the nationalised banks in and The agricultural advance for the state bank group in was per cent and declined to per cent in It is dismal to note that the other scheduled banks have not reached even half of the target during the reference period. The nationalised banks have not only achieved the stipulated target meant for weaker section financing, but have also surpassed it with a fair margin in all the years during the period. The state bank group achieved the target in all the years except in It is distressing that the other scheduled commercial banks failed to meet the target during the reference period. Their achievement per cent in was only 6.06 per cent and it has been reduced to 3.71 per cent in Table 5.11 Achievement of National Targets by Banking Industry in Kerala Year Achievement in percentage ending Agriculture Weaker sections DRI Advances March SBgroup NBs OSCBs SB group NBs OSCBs SB group NBs OSCBs

17 None of the bank groups has achieved the DRI target during the reference period and wide variations are noticed in the performance of all the banks groups. The achievement of the state bank group has drastically declined from 0.95 per cent in to 0.06 per cent in The DRI advances of nationalised banks declined from 0.77 to 0.14 per cent and that of other scheduled commercial banks from 0.28 per cent to 0.03 per cent between and It is obvious that towards the end of the study period, all the bank groups deviated too much from the target and the deviations are extremely high in the case of other scheduled commercial banks. Thus the hypothesis H 12, that is, the national targets for agriculture, weaker sections and DRI advances as set out by the RBI are achieved by the commercial banks in the State, is rejected.

18 The study also disclosed that the other scheduled commercial banks never achieved any of the national targets fixed for the banking industry during the reference period. On the whole it can be said that the performance of other scheduled commercial banks with regard to their socio-economic obligations has been too meagre and inequitable. District-wise Performance The district-wise performance as per DCPs is shown in table As per the table, in and all the districts covered the target. The top performance of the State was in and during this year Thiruvananthapuram and Wayanad districts were unable to reach the target. From onwards, the State recorded a performance score of above 100 per cent. Throughout the reference period, the performance of Kollam district was impressive and their achievement was greater than the State average. Ernakulam district also performed well in all the Credit Plans, but Wayanad district met the target only in three Credit Plans of the study period. Districts Table 5.12 District-Wise Performance under DCPs Performance of total priority sector for the year ending March in percentage Thiruvananthapuram Kollam Pathanamthitta Alappuzha

19 Kottayam Idukki Ernakulam Thrissur Palakkad Malappuram Kozhikode Wayanad Kannur Kasaragod Total The compound growth rates of allocation and achievement are shown in table As per the table, Kannur district has recorded the highest growth rate of allocation with per cent during the reference period and the lowest growth rate of per cent is in Kozhikode district. The compound growth rates of allocation in Kollam, Pathanamthitta, Kottayam, Ernakulam, Palakkad and Kannur districts are higher than the State average. The highest growth rate of achievement is in Kannur districts with per cent and the lowest in Kasaragod with per cent. For Thiruvananthapuram, Kollam, Pathanamthitta Alappuzha, Kottayam, Palakkad and Kannur districts, the growth rates of achievement are higher than the State. Table 5.13 Growth Rates of Allocation and Achievement during to Districts Compound growth rates in percentage

20 Allocation Achievement Thiruvananthapuram Kollam Pathanamthitta Alappuzha Kottayam Idukki Ernakulam Thrissur Palakkad Malappuram Kozhikode Wayanad Kannur Kasaragod Total The growth rates of achievement are greater than the growth rates of allocation for all the districts, except Ernakulam, Kannur and Kasaragod. District-wise Performance of Sectors The district-wise performance of different sectors is shown in table 5.14, 5.15 and Table 5.14 District-Wise Performance of Agriculture Sector Districts Performance scores for the year ending March in percentage

21 Thiruvananthapuram Kollam Pathanamthitta Alappuzha Kottayam Idukki Ernakulam Thrissur Palakkad Malappuram Kozhikode Wayanad Kannur Kasaragod Total Table 5.14 shows the performance score in agriculture sector, table 5.15 in SSI sector and table 5.16 in tertiary sector. As per table 5.14, in the agriculture sector, none of the districts had fully achieved the target during the reference period. Idukki district performed satisfactorily throughout the reference period except in The performance of the State improved from 91 per cent in to 120 per cent in Most of the districts barring Ernakulam and Thrissur recorded performance scores of above 100 per cent in From onwards, the State had recorded a performance score of above 100 per cent.

22 In the SSI sector, as per table 5.15, throughout the reference period the performance of the State was quite appreciating. In the performance score was 108 per cent and it had reached to 110 per cent in The highest performance score of 165 was achieved in followed by 162 in Throughout the reference period, Kollam and Ernakulam districts recorded notable performance. Kasaragod district had achieved the target from to , i.e., for eight years and Thrissur district from to , i.e. for seven years. The performance of Wayanad district is discouraging as they failed to meet the target throughout the reference period and those of Thiruvananthapuram and Malappuram districts are unsatisfactory, as they achieved the target only in one credit plan. Districts Table 5.15 District-Wise Performance of SSI Sector Performance scores for the year ending March in percentage Thiruvananthapuram Kollam Pathanamthitta Alappuzha Kottayam Idukki Ernakulam

23 Thrissur Palakkad Malappuram Kozhikode Wayanad Kannur Kasaragod Total According to table 5.16, in the tertiary sector, the performance score of State has increased from 92 to 105 per cent during the reference period. The best performance of 122 per cent was attained in Performance of Palakkad district was commendable throughout the reference period. Idukki district met the target in all Credit Plans except and Kasaragod district in eight Credit Plans. The performance of Kollam district is disappointing as they kept away from the target throughout the reference period. Pathanamthitta and Wayanad districts achieved the target only in two Credit Plans. Table 5.16 Districts District-Wise Performance of Tertiary Sector Performance scores for the year ending March in percentage Thiruvananthapuram Kollam Pathanamthitta Alappuzha

24 Kottayam Idukki Ernakulam Thrissur Palakkad Malappuram Kozhikode Wayanad Kannur Kasaragod Total In order to find out whether significant difference exists in the performance of districts in different sectors, the following null hypotheses were formulated. H 13. The performance of districts does not differ significantly in the agricultural sector. H 14. The performance of districts does not differ significantly in the SSI sector. H 15. The performance of districts does not differ significantly in the tertiary sector. H 16. The performance of districts does not differ significantly in the total priority sector. Friedman two-way analysis variance by ranks was applied to test the hypotheses. The calculated values of χ 2 r are given in table Table 5.17

25 District-Wise Performance: Friedman Two-Way Analysis (Level of significance 0.05) Details Calculated value χ r 2 Table value χ 2 Result 1. Agriculture sector Accept H SSI sector Reject H Tertiary sector Reject H Total priority sector Reject H 16 Source: Calculated from tables 5.13, 5.14, 5.15 and From table 5.17, it is inferred that the calculated value of χ r for the agriculture sector is less than the table value at 5 per cent level of significance. Hence the hypothesis H 13 is accepted, that is, in the agriculture sector there does not exist significant difference in the performance of districts. But the calculated values of χ 2 r for SSI, tertiary and total priority sectors are greater than the table value and it is concluded that there exists significant differences in the performance of various districts in the SSI, tertiary and total priority sectors. Thus the hypotheses H 14, H 15, and H 16 are rejected. Variations in Targets Comparison of the targets with the previous years achievement for the districts is shown in table Table 5.18 District-Wise Variations in Targets to Previous Years Achievement Districts Variation of targets to previous years achievement in percentage during the year ending March

26 Thiruvananthapuram Kollam Pathanamthitta Alappuzha Kottayam Idukki Ernakulam Thrissur Palakkad Malappuram Kozhikode Wayanad Kannur Kasaragod Total The table reveals that for Thiruvananthapuram, Palakkad, Wayanad and Kannur districts, the targets were more than the previous years achievement throughout the reference period. The same trend was noticed in Pathanamthitta district from onwards and Kasaragod and Ernakulam districts from onwards. For all the districts, the target was more than previous year s achievement in the Credit Plan of On the whole, sector-wise, bank group-wise and district-wise analysis of District Credit Plans from to disclosed that the targets fixed are

27 attainable and are also achieved reasonably. Thus the hypothesis H 17, i.e., District Credit Plans are effective in financing priority sectors, is accepted. Priority Sector Lending and CD Ratio One of the most crucial indicators of banking development is the credit deposit ratio. The CD ratios of different bank groups in the State are exhibited in table The CD ratio of state bank group declined from 54 to 44 per cent, of nationalised banks from 47 to 39 per cent and that of the other scheduled commercial banks from 48 to 41 per cent during the reference period. Thus the hypothesis H 18, i.e., the different bank groups have achieved the CD ratio as fixed by the RBI, is rejected. The Avari Committee appointed by the RBI to look into the State s grievance over the declining CD ratio had recommended that the banks in Kerala had to re-orient their credit operations in such a way that they are able to achieve a CD ratio of 60 per cent by 2001 in two stages, 55 per cent by and 60 per cent by But the banks had not been able to achieve this target in the State. Year Ending March Table 5.19 Credit Deposit Ratios of Different Bank Groups in Kerala Credit Deposit ratios State bank group Nationalised banks Other scheduled commercial banks

28 The priority sector lending of different bank groups as a percentage of total deposits is shown in table Targeting of RBI of priority sector bank lending as a proportion of total credit, and not total deposits, has meant that the priority sector credit fall not only when there is shortfall in reaching the norm itself but also when the denominator used for the norm, namely CD ratio, slip downwards. The low CD ratio means that the priority sector lending too will be low, since the RBI stipulation is that the latter should be 40 per cent of the credit disbursement. The banks claim that they are diligently complying with the RBI stipulation in this respect. However, in actual terms, the State is loosing substantially, because banks have disbursed 40 per cent of their CD ratio and not 40 per cent of the Avari Committee norms of 60 per cent credit disbursement. In other words, if the banks had maintained the Avari Committee norms of 60 per cent CD ratio, the lending to priority sector would have been 24 per cent of the total deposits. Table 5.20 Priority Sector Lending as a Percentage of Deposits Year ending Percentage of priority sector lending to their deposits

29 March State bank group Nationalised banks OSCBs As per table 5.20, none of the bank groups have advanced to the priority sectors 24 per cent of their deposits except state bank group in Thus, there is no disputing the fact that it is not just in the matter of CD ratio that the State has been getting a raw deal. The banks are not doing justice to Kerala s priority sector too.