January February 2007 
Year 13    No.122

The Rajindar Sachar Committee Report


Access to Credit 

1. Introduction

Access to credit is critical for individuals, households and firms for consumption, production and investment needs. Iniquitous access to public and private banking institutions across Socio-Religious Communities (SRCs) can perpetuate disparities. This chapter analyses the extent to which the Muslim community has had access to the banking and credit facilities across various parts of India during the recent five years.

After a careful study of the Prime Minister’s 15 Point Programme in 44 minority concentration districts (59 bank branches) the Reserve Bank of India (RBI) found lack of thrust for increasing the credit flow to minority communities in the lead banks (Circular No. RPCD No. SP.BC.13/09.10.01/2001-02 dated 13 August 2001). The study noted that no officers were designated to cater to the special needs of the minority borrowers in most districts. Even the District Consultative Committee meetings were not held in about half of the districts; and the banking staff was not sensitized to address the exclusive needs of the minority communities. While development programme publicity was absent, it found that even the most important Entrepreneurship Development Programmes were also not promoted. Realizing the limitations enunciated above, the RBI took corrective measures from time to time. This chapter examines the extent to which Muslims have been able to benefit from such measures.

2. Priority Sector Advances of Scheduled Commercial Banks

Priority Sector Advances (PSAs) extended by the Scheduled Commercial Banks (SCBs) form a large part of credit flows from the banking system. (The priority sector broadly comprises agriculture, small scale industries, other activities/borrowers, such as small business, retail trade, small transport operators, professional and self-employed persons, small housing, education loans, micro credit and so on.)

The RBI collects data about relevant details of these advances on a regular basis, which is analysed below. Additional data sought by the Committee from the RBI and SCBs are used to analyse the sectoral profile of advances and deposits to ascertain the share and participation of Muslims.

SCBs in India are categorized into five groups according to their ownership and/nature of operation: (a) State Bank of India and its Associates; (b) Nationalised Banks; (c) Regional Rural Banks; (d) Foreign Banks; and (e) Other Indian Scheduled Commercial (private) Banks. As on 31 March 2005, the deposits of SCBs were Rs. 17,53,174 crores and bank credits were Rs. 11,57,804 crores. The priority sector advances (PSAs) amounted to Rs. 3,45,627 crores (excluding those by RRBs).

From time to time the RBI issues guidelines and directives to banks on priority sector lending and advances. The RBI while prescribing a modified reporting system has advised a target of 40% of all aggregate bank advances to be directed to PSAs. All SCBs file identified district and state specific data on PSAs made to members of specified minority communities vis-à-vis overall priority sector advances for the half year ending on 30 September and 31 March each year. The specified minority communities are: Christians, Muslims, Neo-Buddhists, Sikhs & Zoroastrians. In the analysis below an effort is made to create simplified and aggregate categories which are amenable to  assessing the relative positions of the SRCs.

The data analysed below was provided by the RBI for 27 Public Sector Banks (PuSBs) and 29 Private Sector Banks (PrSBs). In this analysis detailed estimates are presented separately for PuBSs and PrSBs. The client categories or the beneficiaries are divided into three groups: (a) Muslims; (b) Other Minorities; and (c) All Others; data is analysed to examine the flow of credit to Muslims relative to other groups. As the Committee was unable to obtain data on loans applied for, it has relied on three indicators, namely, number of accounts, amount outstanding and the amount outstanding per account. The share of Muslims in number of accounts is an indication of whether they are able to access PSAs. However, it does not take into account the volume of credit; this is obtained from the share of Muslims in amount outstanding. Combining these two parameters, we obtain the third indicator, amount outstanding per account. This gives the average size of the loans – whether ‘Muslim PSAs’ are larger or smaller than PSAs of other SRCs.

It is important to note that while all 29 PrSBs have a share of only 3% in total number of accounts, their combined share in the amount outstanding is 15% or Rs. 329 crores on an average over the period of study. While the share of Muslims as account holders is satisfactory at the all-India level, there is a 12% deficit (compared to the population share of Muslims) in the 44 minority concentration districts. If the quantum of priority sector advances is considered, one finds a deficit of about 9 percentage points at the all-India aggregate level and an even higher deficit of 25 percentage points in the 44 minority concentration districts. On the other hand, while the share of ‘Others’ in account holders is roughly the same as their share in population they have a 10 percentage point advantage in PSA. The condition of ‘other minorities’ is also relatively better, particularly in the 44 minority concentration districts, where their share in accounts and amount outstanding is twice that of their population share.

While these trends can be observed for both public and private banks, the share of Muslims in amount outstanding is 2% higher in PrSBs. Overall, PrSBs have a substantially higher average size of amount outstanding per account for all the SRCs considered. For example, while the amount outstanding was Rs. 19,837 for Muslims, Rs. 40,686 for other minorities and Rs. 59,055 for ‘Others’ in PuSBs; the respective amounts were Rs. 1,11,634, Rs. 2,01,840 and Rs. 2,74,911 in the PrSBs.

Muslims constitute about 12% of All Scheduled Commercial Banks (ASCBs) account holders. While this is close to their share in population the share of other minorities in accounts is slightly more than 8%. This is considerably higher than their share in population of 5.6%. It is noteworthy that the share of Muslims in the ‘amount outstanding’ is only 4.7% compared to as high a share of 6.5% for other minorities.

Even though advances from the PuSBs are higher in magnitude compared to PrSBs the latter are performing better in respect of extending advances to Muslims vis-à-vis other communities. For instance, the Muslim share in amount outstanding is 4.6% in PuSB which is much lower than 6.6% in PrSB. In absolute terms, the amount outstanding as at the end of March 2005, for Muslims was Rs. 15,685 crores, while for other minorities it was Rs. 19,671 crores, as against the total PSAs of Rs. 3,28,755 crores by all scheduled commercial banks.

One of the interpretations of the difference in percentage share in the number of accounts and the amount outstanding is that, while Muslims are able to get loans sanctioned, the amounts obtained for on average are small in comparison to other groups. On an average the amount outstanding per account for Muslims is about half that of other Minorities. The amount outstanding per account for Muslims in private sector banks varies from Rs. 41,085 in March 2001 to Rs. 1,30,224 in March 2005 as compared to Rs. 15,581 to Rs. 28,747 in public sector banks during the same period. On an average, the amount outstanding per account is higher for each SRC in PrSBs as compared to PuSBs. Even within PrSBs, the Muslims tend to get smaller loans than other SRCs.

2.1 State Level Analysis

An analysis of four major states with a large number as well as proportion of Muslim population namely West Bengal, Kerala, Uttar Pradesh and Bihar presents a depressing scenario. For example, in West Bengal, just above 29% of accounts are held by Muslims, 4% more than their share in population; but the share of amount outstanding is an abysmal 9.2%. In case of Kerala the respective shares are 22% and 16% for Muslims — which is lower than their share in population of 25%. A similar situation is found in Uttar Pradesh and Bihar — where the share of Muslims in number of accounts is more or less comparable with their population share, but in terms of amount outstanding their share is significantly lower.

The situation in other states is broadly similar. The state-level situation is similar to the one noticed at the national level; RBI’s efforts to extend banking and credit facilities under the Prime Minister’s 15 Point programme has mainly benefited other minorities, marginalizing Muslims.

Analysis of the amount outstanding per account in the four major states reiterates the fact that while Muslims have a relatively fair share in the number of accounts, their share in amount outstanding remains low. This is also reflected in the amount outstanding per account which is the lowest for Muslims among the three SRCs compared in this analysis. The state which shows a somewhat lower gap between amount outstanding per account of Muslims and Other Minorities is Kerala; the differentials are very high in West Bengal and Uttar Pradesh.

The conditions are similar in all the remaining states except Maharashtra and Tamil Nadu, where the amount outstanding per account for Muslims is higher than for other minorities. This analysis again suggests that while banks are being able to direct credit to minorities, they are not being able to do so specifically for Muslims. This requires closer re-examination which will be undertaken in the analysis of the subsequent section.

2.2 District-wise Analysis

Data on priority sector advances by all scheduled commercial banks was also made available by the RBI for the 44 minority concentration districts covered by the Prime Minster’s 15 Point Programme for the half years ending March 2001, 2002, 2003, 2004 and 2005.

The share of Muslims in accounts in ASCB over the period analysed averages only 20.6%, which is lower compared to their population share of 32.8%. The share of other minorities at 5.0% is higher than their relative share in population of 2.0%. The share of Muslims in amount outstanding is far lower at 8.0%. However, this is not the case with other minorities whose share in amount outstanding is at 3.8%.

In the selected 44 minority concentration districts, the advances from the Public Sector Banks are much larger in magnitude compared to Private Sector Banks. However, in terms of relative advances to Muslims vis-à-vis others, the PrSBs are performing better. The share of Muslims in amount outstanding is 7.9% in PuSBs as compared to 9.9% in PrSBs. In absolute terms the amount outstanding as at the end of March 2005, for Muslims was Rs. 3,535 crores and for other minorities Rs. 1,666 crores, as against the total PSA of Rs. 44,417 crores by ASCBs in the 44 minority concentrated districts. It can be seen that a major portion of the accounts and amount outstanding is from the PuSBs. The share of these banks averages 98.1%, in all accounts and 91.2% in amount outstanding. In terms of number of accounts the share of Muslims in PrSBs is less than that of PuSBs whereas, in terms of amount outstanding, the share of Muslims in PrSBs is higher than that of PuSBs.

There are considerable variations across districts. To facilitate analysis, therefore, the districts have been divided into four groups based on the proportion of the Muslim population - above 40% (11 districts), 26-40% (12 districts), more than 22% but less than 26% (10 districts) and 22% or less (11 districts). In the first group Muslims constituting 51.4% of the total population have a 31.7% share in number of accounts and 11.6% share in amount outstanding. This is awfully low. Their position is relatively better in the second group in which they constitute 34.2% of the population, whereas their share in number of accounts and amount outstanding is 29.3% & 19.3% respectively. The credit off-take of Muslims is again worse in the third and the fourth groups. It can be seen that as the share of Muslims in population increases, their share in amount outstanding tends to decrease so that the deficit between these two shares displays an increasing trend. In all four groups, the availment of credit by Muslims is poor with respect to their population share. The share of Muslims in number of accounts & amount outstanding tends to be significantly below their population shares in most of the districts, except for few in West Bengal and Kerala and one district in Bihar.

What is interesting is that in 33 out of the 44 minority concentration districts the share of Other Minorities in accounts is higher than their population share (against 13 districts for Muslims). The corresponding figures for share in amount outstanding are 32 and 4 respectively. This is in line with the earlier finding for States that the position of Muslims is somewhat better in terms of number of accounts, but much worse when it comes to amount outstanding.

The amount outstanding per account for Muslims has steadily gone up from Rs. 15,463 in March 2001 to Rs. 29,671 in March 2005 in respect of ASCBs. The corresponding estimates for other minorities are Rs. 28,781 in March 2001 and Rs. 57,844 in March 2005. Even here in respect of 44 Minority Concentrated Districts, the Private Sector Banks seem to be lending a higher amount per account to Muslims compared to Public Sector Banks, as reflected in their amount outstanding per account.

While the average amount outstanding per account in the priority sector is nearly Rs. 57,940, Muslims obtained only Rs. 21,823 and other minorities have obtained Rs. 43,954, which is roughly twice that of Muslims. The amount outstanding per account is much lower across all communities for public sector banks - while the average is Rs. 54,005, Muslims and other minorities obtained Rs. 20,343 and Rs. 40,203 respectively. In other words, Muslims receive an amount that is only 37% of the average amount outstanding per account in this sector. In comparison, the relatively higher amount outstanding per account is granted by private sector banks to Muslims, which is 43% of the average in the priority sector, reflecting the tendency of Muslims to approach PrSBs for ‘larger amounts’.

An examination of the average amount outstanding per account for all districts for the year ending March 2005 shows that the outstanding amount per account for Muslims is about half the outstanding amount per account extended to Other Minorities, and one third extended to Others. This again indicates that Muslims are not getting a fair share of priority sector advances.

Given the RBI directives to target credit to minorities in these districts, a comparison of the amount outstanding per account of Muslims and other minorities is relevant for our purposes. The amount outstanding per account to other minorities is almost twice that extended to Muslims. In most of the districts there is a substantial difference between the amount outstanding per account extended to Muslims and other minorities.

The above analysis shows that the attempts to direct credit to minorities in line with the objectives of the Prime Minister’s 15 Point Programme have been generally successful. However, while banks (particularly public sector banks) have been successful in extending credit to Other Minorities, the percentage share of accounts and amount outstanding, and amount outstanding per account of Muslims remains disappointing. This can be seen when these parameters are compared with their share in population or with their corresponding values for Other Minorities.

2.3 Priority Sector Advances by Economic Sectors

This section re-examines the share of PSAs to Muslims by segregating data according to economic sectors namely — Agriculture, Small Scale Industries (SSI) and "Other PSAs". Data exclusive to specific banks were received through the RBI. After subjecting the data received to validation tests, data for 31 banks were retained for analysis.

The share of Muslims in the PSA accounts is the highest in SSIs (11.3%) followed by ‘Other PSA’ (10.1%) and Agriculture (8.3%). In terms of Amount Outstanding, the share of Muslims is highest for ‘Other PSA’ (5.9%) followed by Agriculture and SSI (5.2%). The results of the economic sector-wise and state-wise analysis are similar to the state-wise PSA analysis narrated in the beginning of this chapter. The share of Muslims in terms of accounts is satisfactory in all the three economic sectors for West Bengal, Kerala, Uttar Pradesh and Bihar. However, their share in terms of amount outstanding is far less than their population shares in these states. In most of the other states also the share of Muslims in accounts and amount outstanding is far lower than their population shares.

3. Individual Deposits

In addition to the access of Muslims to PSA extended by ASCBs, an attempt was also made to examine the deposit behaviour of Muslims vis-à-vis the total population. A special effort was made by the Committee to collect information on deposit for the three years ending 31 March 2003, 2004 and 2005 directly from the ASCBs with the assistance of the RBI.

The share of Muslims in deposit accounts is again much lower than their population share. Out of 1,800 lakh deposit accounts with SCBs, the share of Muslims is only 7.6%; this is slightly higher than their share in amount deposited (7.4%). But what is interesting in this analysis is that their share in amount deposited matches their share in accounts, which is not the case with credit.

In Uttar Pradesh and Bihar, the share of Muslims in deposit amount is higher than their share in accounts. In West Bengal, however, the share of Muslims in amount deposited (5.5%) is much lower than their share in accounts (12.1%); the differences are marginal in Kerala. In 10 out of the remaining 17 states, the share of Muslims in amount deposited is higher than their share in accounts. This is a satisfactory situation which is brought out more clearly in the analysis of deposit per account. Uttar Pradesh and Bihar show higher deposit per account for Muslims than the respective State average, Kerala shows a marginal difference and only West Bengal shows deposit per account for Muslims that is slightly less than half of the state average. The deposit per account for Muslims is higher than the state average in respect of 10 out of the remaining 17 States, with the differences being marginal in two other States. Even at the country level, the amount deposited per account for Muslims at Rs. 28,829 is only slightly lower than the national average at Rs. 29,369. This is in sharp contrast to the situation prevailing for PSAs, where it was noticed that amount outstanding per account for Muslims is about half that of other minorities and one third of others.

This shows that the Muslim community is not averse to banking and more improvements can be brought about with specific measures which are spelt out more clearly in the concluding part.

4. Other Specialised Banking Institutions

The Committee also got access to information on credit flows from two specialized lending institutions - Small Industries Development Bank of India (SIDBI) and National Bank for Agricultural and Rural Development (NABARD). The importance of these two institutions lies in the nature of their operations - extending credit to the small scale sector and to the rural economy respectively. It is a matter of concern that even in these highly specialized institutions, the share of advances to Muslims is insignificant.

4.1 Small Industries Development Bank of India

Data relating to all advances of SIDBI for Muslims for six years - 2000-01 to 2005-06 show that the total amount sanctioned to Muslims during this period is a meagre Rs. 180 crores against the total sanctioned amount of Rs. 31,806 crores. The corresponding disbursement figures were Rs. 124 crores against Rs. 26,593 crores. The direct amounts sanctioned and disbursed to Muslims were even smaller.

Muslims are suffering from a double disadvantage - firstly they account for a significantly small percentage in the amount sanctioned and disbursed and secondly, their sanctioned & disbursed amount per account is about one third compared to the overall ratio.

4.2 National Bank for Agricultural and Rural Development

The schemes of NABARD cover small and marginal borrowers and the weaker sections, for both farm and non-farm sectors; it has also taken several initiatives under farm and non-farm sectors aiming to generate/enhance employment opportunities and improve the standard of living of rural poor through enhanced income level. Many of these measures focus on weaker/disadvantaged sections, including Muslims. It has been estimated that 3.2% of production credit and 3.9% of investment credit, amounting to Rs. 291 crores and Rs. 333 crores, respectively, has been provided to the Muslim community on an average annually during the two years 2004-05 and 2005-06. State-wise analysis shows that except in West Bengal, Kerala, Uttar Pradesh, Rajasthan and Tamil Nadu, the share of Muslims in Refinance has been limited; Muslims have also received a good share of investment credit refinance in Assam and Jammu and Kashmir.

The success of NABARD in revitalizing the rural economy through its capacity building and assistance programmes is well known. Moreover, as the schemes are focused towards benefiting economically weak and vulnerable sections of the population and have significant linkages with other sectors of the rural economy, they have considerable potential to benefit Muslims and improve substantially their socio-economic status.

However, despite the tremendous innate potential of NABARD schemes to transform the economic status of the rural Muslim community, inadequate targeting and geographical planning has resulted in a failure to address the economic problems of Muslims in rural areas.

5. Summing Up

The findings of this Chapter show that the access of Muslims to bank credit, including the PSA, is low and inadequate. The average size of credit is also meagre and low compared with other SRCs both in PuSBs and PrSBs. The position is similar with respect to finance from specialized institutions such as SIDBI and NABARD. The Census 2001 data shows that the percentage of households availing banking facilities is much lower in villages where the share of Muslim population is high. The financial exclusion of Muslims has far-reaching implications for their socio-economic and educational upliftment. As was discussed in Chapter 5, self-employment is the main source of income of Muslims. To empower Muslims economically, it is necessary to support self-employed persons by ensuring a smooth flow of credit to them.

The Committee was given to understand that some banks use the practice of identifying ‘negative geographical zones’ on the basis of certain criteria where bank credit and other facilities are not easily provided. Such a practice is referred to as ‘redlining’ in the United States and ‘negative zones’ by some bankers in India. It is possible that in some of these areas the share of Muslim population is high and yet the community is not able to benefit fully from the banking facilities.

Steps should be introduced to specifically direct credit to Muslims, create awareness of various credit schemes through publicity and organize entrepreneurial development programmes, bring transparency in reporting of information about SRCs on provision of banking services. One of the important ways to help communities living in poorer areas, both urban and rural, is to provide micro credit, especially to women. A policy to enhance the participation of Muslims in micro credit schemes of SIDBI and NABARD should be laid down. This will enable Muslims to shift to economically less vulnerable sectors, thereby ensuring a more secure flow of income. Economic empowerment and financial security have important linkages, in increasing demand for education as well as providing the means for doing so. This will initiate an upward push that has the potential to bring about improvements in socio-economic status of the Muslim community.


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