Key role for banks in offering best intermediation services: RBI's Patra

Calls for world-class financial intermediation services with Indian economy poised to surpass Germany and Japan a few years and nation's population set to become world's largest and youngest

As India is on the cusp of becoming one of the largest economies in the world as well as the most populous, housing more youngsters than anywhere else in the world, it will need the world's best financial intermediation services and banks have to play a critical role in this transformation, said Michael Debabrata Patra, Deputy Governor, Reserve Bank of India (RBI).

“By 2025-26, India will match Germany and become the fourth largest economy of the world. By 2027, it will surpass Japan and emerge as the third largest economy of the world. India’s population will become the largest in the world next year and its youngest,” Patra said speaking on ‘Fifty years of Indian banking through the lens of Basic Statistical Returns'.

“It will demand the world’s best financial intermediation services. Banks will have a critical role in this transformation. Information will be the plumbing in this evolving architecture,” Patra added.

The expanding reach of India’s banking network has improved the mobilisation of financial resources in the economy, which is evident from the fact that households currently account for 63 per cent of the total bank deposits and number of deposit accounts per thousand population has increased to over 1,600 now from just 43 fifty years back.

This also reflected in the fact that the ratio of per capita bank deposits to income has risen to 71.2 per cent in 2022 as opposed to just 15.8 per cent in 1972. In the same period, the ratio of per capita credit to income has also risen to 51.3 per cent from 12.2 per cent fifty years ago.

“Branches across rural, semi urban and urban areas have contributed to this mammoth financial intermediation,” Patra said.

Patra also touched upon the fact that the patterns of financial intermediation have also seen a tectonic shift. Industry, which constituted a major recipient of banking credit with almost 60 per cent share back in 1972 has seen its share come down to 27 per cent in 2022, broadly equal to that of services and personal loans.

Further, in the personal loans segment, borrowing by individuals now account for 40 per cent compared to less than 10 per cent back in 2000. This has led to an increase in share of smaller loans, upto Rs 10 crore, in total loans to 60 per cent of total loans up from 45 per cent in 2014, thus bringing in its associated change in assessment, risk management and pricing of loans.

Patra said, on the lending side, the reduced role of term lending institutions and emergence of corporate treasuries with new avenues for short-term financing has had a major impact on India’s banking system.

“This has resulted in (a) increased reliance on banks for long-term funds; and (b) gradual reduction in the share of working capital in total loans. Banks’ asset portfolios have become elongated, with term loans accounting for 65 per cent of total loans,” Patra said.