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Development Banks and the Changing Contour of Industrial Credit in India
The gradual evolution of industrial credit in India in the last three decades is examined against the backdrop of significant structural change in ownership and regulation in the Indian banking sector. The impact of institutional changes in the Indian banking sector during the post-liberalisation phase, especially in the form of the gradual winding up of development financial institutions, on the institutional credit flow to industry is analysed. There is a significant impact of the changing ownership structure of banks on the sectoral allocation of credit. Based on the analysis of sectoral credit flow from the commercial banks and specialised term-lending institutions in India over the last three decades, the need for creating a professional talent pool within the commercial banks for term-lending as well as lending to small entrepreneurs is underscored.
The authors acknowledge the comments received from Sudip Chaudhuri, formerly of IIM Calcutta, and the anonymous reviewers from the RBI and EPW for their useful comments and suggestions. Views expressed in the paper are of the authors and not of their organisation.
The institutional framework for credit delivery to industry and infrastructure plays a crucial role in the overall growth momentum of an emerging economy like India. As per the projections in the Economic Survey 2018, the cumulative infrastructure investment gap will stand at $526 billion by 2040, with the gap between the required and actual amount of investment in infrastructure widening over the years (Ministry of Finance 2018). Like many other developing economies, India too gradually shifted from a state-led development model to a market-led one since the 1990s, as a part of which several specialised term-lending institutions with access to concessional finance and primarily lending on long-term basis, were gradually corporatised. With the demise of specialised term-lending institutions and limited development of the corporate bond market, the financial sector in India is left with a few options but to extend long-term lending to these sectors through its commercial banks, the obvious consequence of which is rising maturity mismatch in banks’ asset-liability profile. Although the private non-banking financial companies (NBFCs) sector, to some extent, substitutes the erstwhile term-lending institutions and complements the commercial banks in providing long-term credit to infrastructure and industrial sectors, a substantial portion of their funding is through public deposits, bank borrowings, debentures, and commercial papers.
As a result, in the case of default of these institutions, the cascading effect would be system-wide, a recent example of which is the liquidity crunch triggered by the default of the Infrastructure Leasing and Financial Services (IL&FS) on its commercial paper. Against this backdrop, this paper investigates the changing nature of institutional credit flow to the industrial sector in India during the last three decades, when significant structural changes took place in India’s banking sector in terms of ownership and regulation, with an aim to understand how a shift from the former state-led to a more market-driven development model impacts the credit system of the country.
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