Credit and Growth

Abstract

India has a bank-dominated financial system. The banking system comprises commercial banks, cooperative banks, regional rural banks (RRBs) and local area banks. As alluded to in Chapter 2, the drive for financial inclusion was a game-changer initiative in the post-2000 period. While expansion of the banking footprint was the general policy focus, concerted attempts were made to improve the financial health of credit cooperatives and RRBs. Given their poor financial health, credit cooperatives were recapitalized and RRBs of a particular sponsor bank within a state were merged. The idea was that by improving their financial viability, these grass-roots level financial institutions can play a more meaningful role in financial inclusion. In addition, some of the initiatives to expand the reach of banking included the introduction of no-frill accounts in 2005; permission for BC and BF models by leveraging technology; and setting targets for banks for embracing villages with a population threshold. The government has also decided to introduce new players in the banking space to give a further push to financial inclusion. Another dimension of policy concerning banks was the thrust to increase the volume of agricultural credit. Towards this end, government set targets for disbursal of agricultural credits to the banks. As such, credit flow to agriculture increased from Rs. 229,401 crore in 2006–7 to Rs. 511,029 crore in 2011–12.