The Financial Express

Allocative asymmetries of bank advances

| Updated: December 05, 2020 20:28:41

Evaly and Fianancial Express Evaly and Fianancial Express
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A  new look at allocation of advances is of critical importance. Almost the entire sum of bank advances  is, indeed, debt capital supplied to several categories  of entrepreneurs (borrowers)  in different sectors and subsectors of  the economy. As per bank statistics on June 30, 2020, the borrowing customers can be divided into  two main groups-- (i) more than 99 per cent  of the customers with average size of advance Tk.2.58 lac, and (ii) less than  1 per cent of the customers with average size of advance Tk.7.50 crore. Extreme asymmetry is observed between the two groups (hereinafter termed as Bottom 99 per cent , and Top 1 per cent for ease of further references in the discussion). Allocative  pattern of advances is indicative of capital concentration, the consequence of which is rise in economic inequality. Which of the two groups  should  be treated with more equity and justice?   Is it wise to carry coal to Newcastle? Is equity maintained across regions?

Data on size-wise  advances  are available, but not distinctly comparable with classification of entrepreneurs ( cottage, micro, small, medium and large). Besides, the classifications involve  unreasonable ranges of investment size. However, an explorative attempt has been made to address the questions raised.

Deposit mobilisation from all kinds of individuals and institutions is not only an important financial function of banks, but also one of the most leading economic responsibilities which have far-reaching effects upon distributional aspect of the economy. Can the pooled savings be lent out indiscriminately (i.e., with no consideration of distributive equity and justice? Savings are transformed into deposits. The banking industry has the opportunity to equitably allocate deposits among numerous entrepreneurs.

Table 1 shows that  in FY 2010, all banks  allocated  only 37.59 per cent of their total advances (average size per account Tk. 1.08 lac) to the borrowers who  fall within the range of  advances worth Tk.5000 to Tk.1.00 crore. Even this  allocation percentage  substantially decreased to 26.27 per cent. Only  specialised banks have kept on raising their allocation  for  the  smallest borrowers. Allocation percentages of  advances  of all other banks   have  fallen down over the decade and these banks have  aligned more  to  the smaller number of  big-size borrowers. State-owned Commercial Banks can accomplish  neither  desired level of commercial profitability  nor social profitability  in terms of serving the smallest size of borrowers  in larger number.

Table 2 suggests the real preference  of the banks' lending. Except the SBs, all other banks  allocate lion's share of their loanable fund  for those borrowers who are few in number. These  borrower groups fall   within  1 per cent  of total number of borrowers. Lending seems to be concentrated  among less than 1 per cent of total number of borrowers' accounts. In FY 2010, the banks lent 62.41 per cent of their allocated fund to 32601 account holders (Top 1 per cent) representing only 0.36 per cent of total borrowers accounts. The same allocation ratio has increased to 73.73 per cent   from 62.41 per cent in favour of  103072 account holders ( i.e. 0.96 per cent ) out of total 10781238.

Table 3 reveals regional disparity over lending allocation. The amount of rural advances   in proportion to  rural deposits  tends to decline on an average over the decade. This is discriminatory for the rural economy. One may argue that the credit requirements of  the rural areas are not  above the level of  fund actually given. This is not acceptable as the rural economy  is yet to reach the point of desirable  and diversified growth .

Can we hold the lending banks liable for asymmetric allocation of advances? The answer is certainly 'no'. They usually and traditionally assign priority  to financial considerations while lending  but it  is the responsibility of the  government to specify the  economic direction and to instruct the  banks to pursue that. It may, however, be hypothesised that widely diffused lending  is less risky than highly concentrated one. Different banks' experiences may  vary in this regard. Surprisingly, little research is carried out  on banking operations in our country.

Millions of entrepreneurs are required. The majority of them  should be  developed to   launch their activities at   small, micro, and cottage  categories so that  investment is sufficiently  spread among the entire productive   population of potential entrepreneurs. The role of  medium and large entrepreneurs would be naturally determined according to the type of industry  or  economic  activity.

Medium and large entrepreneurs should look for  the lion's share of  their business fund in the capital market,  preferably through share issue. Classifications of entrepreneurs need  to be revised  to  lower the range of investment size. Lending allocation among  several sizes and types of borrowers and across regions ought to be  backed by the government policy directives. National policy should aim to maximise investment diffusion as much as possible. Accordingly, compatible principles should be framed  for entrepreneurship development.

Haradhan Sarker, PhD, is ex-Financial Analyst, Sonali Bank & retired Professor of Management. [email protected]


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