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MUMBAI: India's central bank is stepping up pressure on banks to lend to agriculture and smaller business,
fearing a lack of credit could constrain growth in the heart of the fast-expanding economy.
Yaga Venugopal Reddy, governor of the Reserve Bank of India, told industry executives in Mumbai
recently that such lending disparities were an "area of concern, in terms of public perception".
He said it was evident that there was "underpricing of credit risk for private sector corporates while there
could be overpricing of risks in lending to agriculture as well as small- and medium-size enterprises",
adding that there would be "merit in reviewing current procedures and processes of pricing credit".
Agriculture contributes 22 per cent of India's real gross national product and provides a livelihood for three-
quarters of the population. There are about 8.0m small-and medium-size business, manufacturing, for
example, shirts, shoes and car components.
The lack of credit availability to these sectors reinforces a wider point about the shallowness of financial
services in India, illustrated by the country's loans to gross domestic product (GDP) ratio of 31 per cent,
compared with 130 per cent in China.
"Banking, intermediation in India is not increasing at the rate it should be to keep pace with economic
growth," says Leo Puri, director of McKinsey, the business adviser in Mumbai.
In the past half decade, Indian banks' profits have soared because of strong demand for credit to buy homes
and consumer durables and gains from bond trading, a source of income now diminishing with the reversal
in the interest rate cycle. While demand for consumer credit strengthens banks' balance sheets, a tighter
interest rate outlook has forced banks to look for new sources of income to replace shrinking treasury
income.The rural opportunity is an emerging focus. But banks, while confident that rural customers offer
potential for profitable banking, admit they have yet to come up with a cost-effective way of reaching them.
"The real challenge is technical," says Nachiket Mor, executive director of ICICI Bank, India's second
largest.
Another FT Syndication Service report by Jo Johnson from New Delhi adds: The Indian government has
abandoned plans to sell a small stake in Bhel, a state-controlled industrial group, providing further evidence
of the veto Communist coalition partners are wielding over economic reform.
The concession emerged after the general secretary of the Congress party, Ambika Soni, said Manmohan
Singh, prime minister, had written to Sonia Gandhi, party president and leader of the governing coalition, to
inform her that the government had decided to keep the proposed sale "in abeyance".
In July Left Bloc leaders went over Mr Singh's head to Mrs Gandhi in what now appears to have been a
successful attempt to reverse a cabinet decision to sell a 10 per cent stake in the electrical equipment group.
The Left Bloc claimed the proposed sale would breach pledges made in May 2004 in the National Common
Minimum Programme (NCMP) policy blueprint, walked out of the coalition's co-ordination committee and
held a national strike on September 29.
Mrs Soni said Mrs Gandhi had written a letter to the leader of the Communist party of India (Marxist),
Prakash Karat, formally conveying the prime minister's decision and appealing to the left parties to rejoin
the co-ordination committee.
The row over Bhel undermined confidence in the power-sharing relationship between Mr Singh and Mrs
Gandhi.
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