The Reserve Bank of India has warned of deep imbalances in the country’s lending system saying capital is allocated to elite industrialists but not to the broader, more dynamic economy. Such a constrained banking system in a large emerging market threatens to restrict economic growth, said the RBI and economists. It also poses a social threat in an economy that needs to create millions of jobs for a young population. K.C. Chakrabarty, Deputy Governor of the central bank responsible for lending supervision, said India’s largely state-owned banking system urgently needed to build capacity to extend credit to a bigger share of the country’s 1.2bn people. He told the Financial Times that failure to achieve “financial inclusion” of the poor would mean that “this society will not survive” and banks must develop a business model to cater for the broader population. Up to 65 per cent of people in India do not have access to bank facilities. “You cannot have financial inclusion in an exclusive society,” he said. His appeal comes at a time when concerns are rising about debt owed by the country’s leading industrialists — such as Vijay Mallya, the chairman of UB Group and Anil Ambani, the chairman of Reliance ADAG — to state-owned banks, which have suffered a rise in non-performing assets as domestic borrowing costs have risen. The government asked the RBI on Thursday to make public details of the top 100 industrialists who had defaulted on loans. The RBI also bought back $2bn of bonds in response to concerns over liquidity in the banking system. Economists have voiced fears that the domestic banking system will be unable to fund India’s fast paced growth against a background of retreating foreign capital flows, rising domestic borrowing costs and a depreciation of the rupee. Many of India’s small businesses and the majority of its people, who earn livelihoods from the rural economy, are starved of credit despite the government offering interest subsidies on loans. “It’s not the cost of credit that is important for the poor, it’s the availability of credit that is important,” Mr Chakrabarty. said “Commerce for the poor is more viable than commerce for the rich . . . The banks are giving the Ambani [brothers] a loan at 9 per cent. Why can’t they give agriculturists a loan at 13 per cent?” The deputy governor said “corrective” measures were under way to reshape the banking system. He expected that private banks would take the lead by finding technological solutions to reach a wider market. Only 5 per cent of India’s 600,000 villages have bank branches but, as part of a financial inclusion policy, the RBI is making the allocation of licences for branches in metropolitan areas conditional on the expansion of services in country areas.
FE
