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Chetan Dudhe
University of Debrecen
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CHETAN DUDHE
Phd Scholar
Faculty of Economics and Business
University of Debrecen, Hungary
Abstract
Banking sector acts as a backbone of modern business. A well organized banking system is
necessity for the economic development of a country. In India all commercial banks excluding
Regional Rural Banks and Local Area Banks have become Basel II compliant as on March31,
2009. Banks being fundamental components of financial system are the most effective way to
generate the credit flow of money in markets. At the same time banking industry like many other
financial services face a rapidly changing market, new technologies, economic fears, nasty
competition and especially more customers demands. The central objective of the study is to
empirically investigate a role of Indian banks in capital formation and economic growth.
Research is based upon the secondary data which provide the findings on commercial banks and
how it is helpful in economic development. The data analysis of the 47 commercial banks of
India revealed increased budget of loans provided every year. It is therefore recommended that
efforts should be made by the monetary authorities to effectively manage the banks maximum
lending of banks. This policy thrust will most likely result into increased investment activities
which will enhance the capital formation in India needed for its real sector investments and
industrial growth.
Central Co-operative
Indian Banks Foreign Banks
Banks
Agarwal (1993) in his paper analyzed the profits of Public Sector Banks after their
nationalization and determined determinants of profitability. The study covers State Bank Group
and Nationalized Bank Group. Time series data for the period 1970-1987 has been used for the
analysis. The profit equation was estimated by ordinary least square method. Empirical results
indicate that profitability of public sector banks has been adversely affected by increasing
statutory reserve ratios, lending to priority sectors at lower rates of interest, expansion of bank
branches in the rural and semi-urban regions and rising wages of employees. Declining labour
productivity has also adversely affected profitability. Time deposits were found important to
encourage profitability. The two banking groups were found significantly different in their
financial performance.
Mathur (2002) examined the arguments extended to a case for the privatization of public sector
banks mainly nationalized banks. Re-capitalization of Public sector banks is a huge burden on the
government budget. State ownership of banks reduces competition and thus rises inefficiency.
There is no evidence that state ownership banks lower the probability of banking crisis. Private
and foreign banks stimulate efficiency, innovation and economic growth. It is held that the
arguments which are put forward for the privatization of PSBs are not strong. Private ownership
may lead to crisis if the regulatory system is unable to control the adverse extraneous pressures.
State ownership of banks should be maintained until the conditions such as smooth legal system,
strong regulatory framework, reduced fiscal deficit and a sharp reduction in controls on flow of
foreign capital are appropriate for privatization.
3. Role of Banks
A) Mobilizing Saving for Capital Formation:
The commercial banks help in mobilizing savings through network of branch banking. People in
developing countries have low incomes but the banks encourage them to save by introducing
variety of deposit schemes to suit the needs of individual depositors. They also mobilize idle
savings of the few rich. By mobilizing savings, the banks channelize them into productive
investments. Thus they help in the capital formation of a developing country.
B) Financing Industry:
The commercial banks finance the industrial sector in a number of ways. In generally they
provide short-term, medium-term and long-term loans to industry. In India they provide mainly
short-term loans as well medium-term loans for one to three years. But in Korea, the commercial
banks also advance long-term loans to industry.
C) Financing Agriculture:
The commercial banks help the large agricultural sector in developing countries in a number of
ways. They provide loans to traders in agricultural commodities. They provide finance directly to
farmers for the marketing of their produce, for the modernization and mechanization of their
farms, for providing irrigation facilities, for developing land, etc. They also provide financial
assistance for animal husbandry, dairy farming, sheep breeding, poultry farming, and horticulture.
4. Research Methodology
This paper is the result of a secondary data on Indian banking sector with special reference to
Indian context. To complete this, annual reports, various books, journals and periodicals have
been consulted, several reports on this particular area have been considered, and internet
searching has also been done. In order to carry out the present study the following methodology is
in use. The study is the result of general search of literature in the related field. First of all the
information will provide in annual reports will have been rearranged in terms of Sanctions,
Disbursements, Recovery, Non Performing Assets and also provisioning. The main source of
information is annual reports of all Indian banks. Secondary information was gathered from the
published annual reports and financial statements, project appraisal manual, lending policy
manuals, text books journals and websites etc. and entire banks website.
5. Statistics And Facts
Table 1: Industry-Wise Deployment of Bank Credit
Note:- Data are provisional and related to select 47 banks, which account for 95% of total non-
food credit extended by all schedule commercial banks (Source :- https://dbie.rbi.org.in)
6. Results
All the commercial banks in India provide loans in every sector. The banks have been able to
provide necessary capital support to the sectors for development in the form of loans. However
gradual decreased of loan availability was observed in some of the dominant major sectors
namely Textile, Construction, Petroleum, Chemical sectors etc. The loan received by Textile
sector in 2008 (12.56 %) was reduced to 8.11 % in 2016. Its average value during the period was
9.60 %. Similarly loan obtained by Construction, Petroleum and Chemical sectors (3.68 %, 5.48
% and 8.15 %) in 2008 were also reduced gradually to 2.94 %, 2.02 % and 6.49 % respectively in
2016. Fluctuation in the loan status could be observed in some of the sectors like Rubber and
Plastic, Gems and Jewellery and Basis Metal and Metal Products etc.
40
G
r 35
o
w 30
i
n 25 Textiles
g
20 Chemicals &
Chemical Products
r
a 15 Basic Metal &
t Metal Product
e 10
Infrastructure
5
(
%
)
0
2008 2009 2010 2011 2012 2013 2014 2015 2016
Years