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Speeches of Alagappa Chettiar |
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BANKING IN INDIA (Article) In this short article I propose to discuss or rather outline one aspect of the problem of credit, namely, the gap that exists between borrowing and lending and the need for bridging this gap. It is well known that a bank performs the double function of receiving deposits on which it pays interest and lending funds on which it collects interest. Generally, in discussing the problem of credit, the tendency is to invite attention to the need for providing cheap credit to agriculture and industry, to remove the rigour of repayment policy such as disfigures the loans given departmentally, the provision of long term credit, and the like. Rarely do even experts spend time in discussing the more important and definitely antecedent problem of providing the funds out of which the loans are to be given. This problem is always important, but it is all the more so at the present time. The accepted policy of the State is to fix a ceiling on land. Efforts are also being made to distribute land to the landless through voluntary land gifts. This policy is creating a large class of men who are in possession of landwithout the means to carry on the profession of agriculture. A person to whom land is given requires seed, implements, bullocks, and funds to tide over the period till the next harvest. As a laborer, he had no such problems. As tenant, these expenses were either borne by the landlord, or at least the necessary credit was given by the landlord. Today he stands independent, and the entire scheme of Boodhan will be wrecked for want of credit to the new owner of land. Besides, the country is embarking on a gigantic plan of capital investment, involving thou- sands of crores, and the success of the plan depends on the extent to which savings can be stimulated. The second Five year plan proceeds on the assumption that the rate of investment which now stands at 7% of the national income will be stepped up to 11% during the next five years. It is thus seen that the problem of stimulating savings and the problem of using these savings economically and to the maxi- mum advantage is one that calls for thought. Certain facts and figures are relevant in this connection. The Reserve Bank's annual report for the year 1954 gives the following figures. During the last year, deposits in banks increased by 91 crores. But there was no corresponding increase in the ratio of advances to deposits. The volume of currency was increased by 129 crores, i.e., by more than 10% of the total in circulation. The index of agricultural produce stood at 113.5 as against the base of 100 for the year 1952-53. These three facts should be read together. Normally such an increase of money as has taken place should have led to inflation. But it is very dangerous to be complacent that it has not done so. The reason is obvious, and is nothing else than the glut of agricultural produce. Any student of economics knows that the products of agriculture has a notoriously inelastic demand. Added to it are the poor holding powers of the small cultivators, and the inadequate provisions for storage on credit. It is, therefore, safe to say that the present arrest of inflation is largely due to the good and plentiful harvest; and in a country which depends so much on the vagaries of nature one had year is likely to create sudden problems of inflation. The increase of deposits in the banks will, with a drop in the quantity of agriculture produce be soon converted into spending money. It seems as if we are banking for more on the possibility of good harvests than we should, in calculating future investments. Further, the primary function of a bank is to provide credit for industry and trade. The huge institutional investments in Government loans is certainly not the sign of a sound credit economy. It shows on the other hand, that the credit institutions are full of surplus funds which they have to invest cheaply. This means that the margin between the interest that the bank has to pay to its depositors and the interest that it earns on its own investments is narrow. It also means that for some reason or other it is unable to utilise its resources more profitably and one may add, more legitimately. Can we say that the credit needs of the country are so fully satisfied +liar the money invested by the banks is a surplus? That is not the position. The credit needs of the country are far from being satisfied. my then does this anomalous position exist? A probable explanation is to be found in the fact that the credit needs of the agriculturist and the period of the deposits in the banks do not harmonies. The agriculturist has to borrow for such necessary expenses as the digging of wells, levelling of land, purchase of bullocks, and ploughs of an improved pattern~ conversion of land from dry to wet and such like investments. These expenses are of a semi capital nature. The recur, say, once in five or six years, and the loans that he requiresare for about the same period. But the deposits in banks are for much shorter periods. Consequently the proportion of deposits to loans cannot be very This is one of the major credit problems that this country has to face, i.e. to create a credit structure that attracts medium period deposits. At present, the towns deposit, and the villages borrow. The villager looks to some one else to provide the money. Unless we are able to make the rural surplus flow into banks this problem will exist for ever, and the credit available will not be fully utilised. This can be done by means of small banks, that cover areas of ten or twelve adjoining villages. Whether these small banks should be co-operative or joint- stock is a different question, but it is not likely that the villagers will deposit their moneys in large and impersonal institutions that remind of a Government office which he generally dreads, and whose ramifications of procedure frighten him. Further, village credit has an intensely personal element; and if the rules of credit worthiness are strictly followed several persons will not be entitled to any loan. Especially so with respect to the new landlords created by, the goodwill of the Boodhan movement. No State Bank will be able to introduce the personal element that calls for risks. Nor will it attract local deposits as it should. The problem is thus to provide village credit with a large proportion of village funds and to supplement it with other funds which latter should primarily be utilised for short-term crop and other advances. Perhaps I have over simplified the problem, but within the compass of a short article it is not possible to do anything more than indicate the problem and a suitable approach to solving it. The subject needs detailed study and a bold solution.
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