COMMERCIAL BANKS IN INDIA—A PERFORMANCE REVIEW

Summary

Delivered as the annual public lecture under the auspices of the A. D. Shroff Memorial Trust in Bombay on 26 May 1986 and released as a booklet on 14 July 1986, this address by N. N. Pai—former Chairman and Managing Director of the Industrial Development Bank of India and Corporation Bank—offers a forensic review of the seventeen years since the nationalisation of fourteen major commercial banks in July 1969. Pai’s central argument is that the banking system had achieved genuinely remarkable quantitative gains in social outreach, but that the pace and direction of that expansion had simultaneously degraded quality, eroded profitability, and starved the medium and large industrial sector of working capital.

The balance sheet of social banking is impressive on its own terms. Bank branches expanded from 8,262 in June 1969 to 51,385 by June 1985—more than 65 per cent of new offices opened in centres that had never before had a commercial bank—and the average population per branch fell from 65,000 to 13,300. Deposits grew from Rs. 3,599 crores to Rs. 76,373 crores; individual deposit accounts rose from 38 million to 145 million. Priority-sector lending exceeded its mandated 40 per cent target, reaching Rs. 17,971 crores or 41.3 per cent of total credit by March 1985—a forty-one-fold increase over June 1969. Credit to small-scale industries expanded from 2.25 lakh units financed in December 1974 to 14.55 lakh units by 1984, with advances rising from Rs. 1,017 crores to Rs. 6,537 crores. Agricultural advances stood at Rs. 8,932 crores in December 1985, though the recovery rate was only around 50 per cent of demand.

Against these achievements Pai sets a long indictment. The share of medium and large industry in gross bank credit collapsed from roughly 67 per cent in 1969 to barely 34 per cent by 1985—even though this sector is, in Pai’s analysis, the lead dynamic force of any economy. Statutory Liquidity Ratio and Cash Reserve requirements locked up 56 per cent of new bank resources at below-cost yields, leaving only about 20 per cent of deposits available for reasonably profitable deployment; the net result was that on every Rs. 100 of deposits mobilised, the banking system lost almost a rupee. Industrial sickness worsened sharply: 93,371 sick units (545 large, 1,281 medium, 91,545 small) had Rs. 3,638 crores of bank credit locked up in them by December 1984—a 124 per cent increase over the Rs. 1,623 crores blocked in 1979, representing 8 per cent of total bank credit. Pai attributes sickness primarily to absent pre-loan appraisal, diversion of short-term credit to long-term assets, and lack of post-disbursement monitoring, and calls for banks to establish a professional cadre for ‘turn-around missions’. On human resources, he argues that the banking sector’s 6.42 lakh employees should be trained through dedicated university banking degrees rather than re-educated on the desk after hiring. He closes with a cautious appraisal of the Sukhamoy Chakravarty Committee’s recommendations on interest-rate liberalisation, endorsing the linking of lending and deposit rates to long-term inflation but warning that rigid linkage would impair banks’ ability to price out speculative borrowers during short bouts of high inflation.

Key points

• Bank branches grew from 8,262 in June 1969 to 51,385 by June 1985—over 65% in previously unbanked centres—cutting the average population per branch from 65,000 to 13,300, an expansion Pai says no other country could match.

• Priority-sector lending surpassed its 40% target, reaching Rs. 17,971 crores or 41.3% of total credit by March 1985—a forty-one-fold increase since June 1969.

• The share of medium and large industry in gross bank credit collapsed from about 67% in 1969 to barely 34% by 1985; industrial output growth has never regained its Third Plan (1961–66) pace since this reorientation.

• By December 1984, 93,371 sick industrial units had Rs. 3,638 crores of bank credit locked up in them—8% of total bank credit—a 124% increase over the Rs. 1,623 crores blocked in 1979.

• Statutory Liquidity Ratio and Cash Reserve requirements pre-empted 56% of new bank resources at below-cost yields; only about 20% of deposits could be deployed profitably, causing the banking system to lose almost a rupee on every Rs. 100 of deposits mobilised.

• Agricultural loan recovery rates stood at around 50% of demand; Pai blames poor appraisal, under-financing, irrational loan maturities, and politically motivated default on the eve of elections—but acknowledges banks themselves contributed to the overdues problem.

• Pai argues for dedicated university banking degrees rather than on-the-desk training for the 20,000–25,000 new staff banks must recruit annually, and calls for the National Institute of Bank Management to lead this reform.

• On the Chakravarty Committee proposals, Pai endorses linking lending rates to long-term inflation (implying a minimum lending rate of 13% if inflation stays near 8%) but warns that rigid rate linkage would prevent banks from pricing out speculative borrowers during short periods of acute inflation.