Growth and Developmental Aspects of Credit Allocation: An inquiry for Leading Countries and the Indian States

The world’s so-called developed countries of the West have long economic and political history compared to those of the East. The developed countries are far away from today’s developing countries in terms of aggregate income, aggregate capital formation, total number of human capital, etc. Though some countries from the East have outpaced some of the Western countries in terms of gross domestic product (GDP), aggregate bank credit and capital formation, in the twenty-first century, such as China and India, they are far behind in terms of per capita income, per capita financial facilities and per capita capital stock. On the other hand, the countries from the East, except a few one, are also well lagging behind their Western counterparts in the level of human development. With the theme of the book on the growth and developmental aspects of credit allocations, the present chapter makes an introduction to the subject area by means of credit histories in the selected 10 countries and their phase-wise levels of GDP, credit and Human Development Index (HDI). The figures for GDP, credit and HDI reflect the rising trends in GDP and credit for all in the entire phase but there are some downfalls in the GDP and credit during the phase of the global financial crisis. Besides, it observes rising trends of HDI in all the countries but the rates of rise are more in the case of the developing countries. There are thus the possibilities of getting correlations among the different pairs of the variables across the countries.

With the aim of analysing the growth and developmental aspects of bank credit allocations in the selected countries, the primary requirements are to see the trends of the lead variables, credit, gross domestic product (GDP) and Human Development Index (HDI), and get ideas on the descriptive statistics. The present chapter has attempted to do all these primary analyses across the countries for the period of 1990–2019. The study observes that the levels of GDP have increased for all the countries throughout the entire period with some downhill breaks during the global financial crisis of 2007–2009. There are also similar types of upward trends in the credit delivery to the private sectors of the countries over time with some exceptions in the second phase (2001–2010) for Germany and the first phase (1990–2000) for Brazil. On the other hand, the HDI values for all the countries have improved over time in the entire period of time and the developing countries in the list have progressed more in all three indicators, GDP, credit and HDI, compared to that of the developed countries in the list. The correlation analysis of credit with GDP and HDI shows positive coefficients in many of the developed and developing countries which primarily justify the existence of strong linkages of their financial sectors with their real sector and overall development.

There are two important determinants in the banking system which directly affect the number of credit deliveries to the economy in the first round and impact the growth and developmental status of the economies in the second round. They are the amount of non-performing assets (NPA) and the number of banking funds invested in the governments’ securities. The present chapter, thus, focuses on the trends of these two and their associations with the credit, GDP and human development of the countries. First, it develops a basic theoretical structure of credit creation in the banking system and then develops theoretical linkages among the two lead variables, NPA and investment, in relation to the rest of the economy. Then, it goes for empirical exercises from the perspectives of the descriptive statistical analysis. The trends of NPA and investment show rising trends in almost all countries. Furthermore, it is found that the signs of correlation coefficients between the two with credit, GDP and HDI are positive in most cases of the list of developing countries and negative in some cases of the list of developed countries.

Sequel to the results of the preceding chapter that depicted positive associations of credit with the indicators of growth and development, the present chapter aims at investigating the interrelationships of credit with GDP and HDI separately in a bivariate framework for the selected countries for the period 1990–2019. For this purpose, this chapter first develops a theoretical model in line with the Barro (1991) model where bank credit is introduced as a good institutional component of endogenous growth. Then, it goes for a time series exercise to establish the long-run relations and short-run dynamics for the pairs of variables, credit-GDP and credit-HDI, to justify the linkages between the financial sector and the real sector. The study arrives at mixed results across the countries. In many cases, credit has been identified to be strongly related to income and development indicators in the long run through cointegrated stable relationships. Furthermore, credit makes a causal influence on GDP and HDI in some developed countries whereas GDP becomes a causal factor to credit in some developing countries. It is thus recommended for further aggravation of the two sectors’ linkages under the patronisations of the governments and the monetary authorities of the countries to have high growth of income and development so that a part of the sustainable development goal can be achieved through the financial sector.

In continuation to Chapter 3, the present chapter tries to quantify the impact of credit upon GDP and HDI as the first attempt and the linkages of NPA and security investments with credit, GDP and HDI of the countries as the second attempt. For these purposes, this chapter starts with the measurements of credit elasticity with respect to GDP and HDI to know the impact of credit on the private sectors upon the income and human development of the countries. Then, it focuses on the implications of common banking operating tools such as their investments in the governments’ securities in relation to credit to the private sectors, GDP and HDI of the selected countries in a panel data format. The results of the credit elasticity of GDP show that it has taken the positive sign in all of the countries and the negative changes are very little in number. Furthermore, the results on the linkages show that all the variables are mostly cointegrated and therefore maintain stable and equilibrium relationships in the long run among them. But the short-run results show that investment and credit make a cause to NPA, and investment and NPA make a cause to GDP. No variables make any interrelationships with the HDI in either the long-run or short-run systems. Thus, the countries in the list should put more emphasis on the working of the financial sectors as the key partner in the income-generating activities.

With the growth of income at the global level, the World Bank data show that there are rising levels of income disparity across countries, groups, regions and within the countries. This fact otherwise hints at the inter-country divergence in incomes, particularly between the developed and developing countries of the world. This chapter, therefore, attempts to examine the convergence or divergence in credit, GDP and HDI across the 10 selected countries for the period of 1990–2019 applying the neoclassical growth approach and the time series approach. The results of the exercise in line with the neoclassical theories on absolute convergence and sigma convergence show that the countries are unquestionably converging in GDP and HDI with mixed results in case of credit. The results of convergence in GDP and HDI in all the countries and their developed and developing counterparts provide a possible explanation as to why the cross countries’ income inequalities as well as world inequality in income and development are reducing over time. On the other hand, the results of the time series approach display that credit and HDI are converging in both absolute and conditional terms but the countries are converging in conditional terms only for GDP. Thus, the claims of the World Bank are not valid for the selected countries in the chapter, rather, they can be verified by taking other countries and groups into consideration.

Recalling that the introductory chapter (Chapter 1) wanted to carry out similar types of analysis for the major states in India. Thus, the present chapter tries to examine the trends of a bank branch, deposit, credit, the credit–deposit ratio, sectoral shares of credit, magnitudes of banking transactions, credit concentration, etc., for the selected 15 states and Delhi as the only union territory for the period 1972–2019. The study period covers the pre-reform period from 1972 to 1992 and the post-reform period 1993–2019. The observations show that the branch, deposit and credit did not grow significantly during the post-reform period. As a result, the credit–deposit ratio did not increase significantly during the reform period. But, the magnitude of banking transactions increased in most of the states during the reform period. Regarding the sector-wise share of credit, AP, Maharashtra, UP and TN are the leading states in agricultural credit, WB, Gujarat and Maharashtra are in industrial credit and Kerala, Assam and Delhi are in the service sector. On the other hand, the study finds rising magnitudes credit concentrations of the states during the post-reform period in contrast to the declining concentration in the pre-reform period. Maharashtra is the state which holds around 25 per cent of all states’ credit throughout the entire period of 1972–2019. Hence, there are the notions of rising disparity and inequality in credit as well as incomes of the states and all India levels.

The values and trends of the credit–deposit (C-D) ratio in countries and the states within them depend on several factors. Two such factors that the present study considers are the banks’ loanable funds locked under the heads of non-performing assets (NPA) and governments’ securities investments. Increases in the amounts of NPA and securities investments usually lead to a decrease in the allocations of bank credit to real investment purposes, such as industrial, service and agricultural activities and vice versa. On this background, this chapter examines the trends in bank credit in relation to the NPA and securities investments in the states of India and tries to find out the real cause of concern on the falling trends in the C-D ratio in the post-banking reform phase. We may now summarize that the falling C-D ratio or the rising quantity of flight of credit to the real sectors is closely associated with the banks’ investment of extra amount on securities over their statutory limits. This study finds that the NPA ratio at all-India levels is gradually declining while the investments on securities are increasing during the post-reform period. Such a craze behind this investment has an inevitable effect on the magnitude of credit delivery to the commodity-producing sectors. This means that the NPA threat is not a real threat to explain the downward trend of C-D ratio but the magnitude of security investments in both the central and state governments is a real threat and the downward trend of the C-D ratio is the result of this fact. Even though banks are safe in terms of their returns, the scenarios are not good for the rest of the economy as it creels their sustainability.

Like the cross-country convergence or divergence analysis in incomes to address the global phenomenon, the same analysis is also required to be done in the case of a group of states within a national territory. Further, it is also required to see whether convergence or divergence in incomes of the states is attributable to the convergence or divergence in their allocations of bank credits. Thus, this chapter aims at examining whether the selected major states in India are converging or diverging in the allocations of bank credit, and if so, what will be the magnitudes of decreases or increases in the level of disparities and inequalities in credit allocations. This study concludes that there is a clear diverging tendency of credit allocations of the states of India during the post-reform period so far as the absolute convergence hypothesis of the neoclassical theory is concerned. Further, in terms of the framework of σ convergence, the study observes that all phases of the Indian economy have produced converging paths of the inter-state credit allocations, and the path becomes diverging during the post-reform phase. Based on the quantifications of the magnitudes of disparities and inequalities in terms of CV, C4 concentration, HHI and Gini values, this study thus reveals that there are significant increases in the levels of disparities and inequalities in the allocations of credit to the states from the pre-reform to the post-reform phases. Therefore, the persistence of divergence in income or rising income inequality during the phase of the major reform program in India may be due to the persistence of divergence and rising inequality in the allocation of bank credit.

The literature on sustainable development reveals that the financial sector and the real sector should maintain a coherent association in the long run. Thus, like that in a country-level significance, the relevance of the investigations of the interrelationships between the financial sector’s development and the growth and development of the states within a country is also required to be done. This chapter tries to examine the interrelationships between two sets of variables, bank credit and state output, and bank credit and human development, for the pre-reform and post-reform periods. Using the appropriate time series econometric analysis, the study finds no long-run relationships between credit and NSDP during the pre-reform period but it has observed a number of states where such stable relations hold during the post-reform period. Again, there are mixed results between the two in the Granger causality analysis during both the periods. There are the states like AP, Bihar, Karnataka, Kerala and WB where developments in the financial sector influence the growth of the real sector, while the reverse causality, that is, from the real sector to the financial sectors works in case of Assam, Haryana, MP and Maharashtra. Bidirectional causality between the two is observed in the states like TN, WB, etc. Further, the study finds very small number of states where credit and human development are interlinked in the long run. However, in the short run, the financial sector makes influences to the human development in case of the states like Bihar, Odisha and TN.