Correcting the Distortions in Bank Lending

The union finance minister has recently highlighted the continued neglect of a large section of the farm community from institutional credit and the tendency by banks to raise interest rates on loans at the slightest opportunity. Banks have been asked to raise credit to 50 per cent of GDP as against the present 35 per cent and bankers are expected to move away from the rigid lending policies pre-empted by the existing customer base. The new business opportunities need not be inconsistent with reforms and efficient business goals: higher profitability could be achieved by risk mitigation models and expansion of the share of non-fund businesses. A lesson in this for the monitoring authorities is to incorporate into their policies the considerations of a larger credit base and more importantly its wider distribution amongst sectors, regions and size classes.