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An Anatomy of Credit-Deposit Ratios Among Indian States

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DOI: 10.13140/RG.2.2.35337.56167

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 An Anatomy of Credit-Deposit Ratios Among
Indian States

Silu Muduli
Assistant General Manager
Reserve Bank of India, Mumbai, India

Tejadipta Behera
Assistant General Manager
Reserve Bank of India, Hyderabad, India

The authors are grateful to Shri Ramesh Golait, Shri Muneesh Kapur, Dr. Pallavi Chavan, and
Ms Tista Tiwari and other participants for their valuable comments during the RBI DEPR
Study Circle. This paper has also benefitted from the comments of an anonymous external
reviewer. The views expressed in the paper are those of the author(s) and not necessarily those
of the institution to which they belong.
An Anatomy of Credit-Deposit Ratios Among
Indian States

Abstract

This paper analyses the state-level variation in the credit-deposit ratios in India. The
credit-deposit ratio in the southern, western, and northern States of India is above the
national average. By contrast, in some other States, it is below 50 per cent. The paper
finds that States where households have a higher share of valuables (gold jewellery, gems
and precious stones) in their asset composition, have a higher share of personal and agri-
cultural loans, and consequently, greater indebtedness. A higher per capita income, and
better infrastructure and banking service availability create a higher demand for credit,
leading to a higher credit-deposit ratio. Moreover, an improved ease of doing business and
the presence of self-help groups can also lead to higher levels of indebtedness. States with a
higher contribution to national industry gross value added have a higher demand for indus-
trial loans. A similar evidence also exists for agricultural loans. Improved infrastructure,
continuous credit monitoring and promotion of rural economic activities in States having
low credit-deposit ratios can accelerate credit offtake and improve the credit-deposit ratio.

Keywords: Financial inclusion, credit-deposit ratio, microfinance.

JEL Classification: G21, H81, R11, R28.

1
1 Introduction
A series of financial inclusion policies in India was implemented following the independence to
include all its citizens in the formal banking system. Reforms started with the nationalisation
of banks in 1969 and 1980 in the spirit of inclusive banking. A major thrust on financial in-
clusion came after its emphasis in the Reserve Bank of India Annual Policy Statement 2005-06
for revisiting the objective of financial inclusion. Later, recommendations of the Committee on
Financial Inclusion (2008) broadly plotted multiple comprehensive paths to improve financial in-
clusion.1 Introduction of Pradhan Mantri Jan Dhan Yojana (PMJDY) in August 2014 reinforced
the financial inclusion policy providing individuals with basic savings bank accounts, affordable
need-based credits, remittances facilities, insurance products, and pensions. Financial inclusion
policies are aimed at the mobilisation of savings and extension of affordable credits for overall
inclusive development. These savings were channelised through credits for investment, which ulti-
mately adds to India’s gross domestic product (GDP), creates employment, and improves overall
economic development (Sen, 2000; Sharma and Bardhan, 2017). Financial inclusion helps house-
holds in managing financial risks and secure smooth consumption in the future (Kelkar, 2010).
Moreover, these policies are also crucial for alleviation of poverty in a developing country like
India (Banerjee, 2003; Sarma and Pais, 2011). Banks are the primary intermediaries in India
between households and firms that mobilise savings from the households and extend credits to
firms. The Credit-Deposit ratio (henceforth, CD ratio) is a financial development performance
indicator that indicates the amount of credit disbursed according to the place of utilisation in a
state with respect to its mobilised deposits.2 Studies find there is a strong positive association
between sub-national economic growth and CD ratio in India (Chakraborty and Chakraborty,
2018; Iqbal and Sami, 2017).
From end-March of 2012 to 2022, the average CD ratio of India has remained around 76.2
per cent, however, the gap between states’ lowest and highest CD ratios has widened over time.
States in the north-eastern part of India have relatively lower CD ratios, while certain states
in the southern part of India (for instance, Andhra Pradesh, Tamil Nadu, and Telangana) have
CD ratios of more than 100 per cent. This could be a major concern from the perspective of
inclusive financial development and credit allocation. For instance, initially, financial inclusion
policy interventions in India were aimed at mobilising savings, while in recent times the focus
is being reoriented to rural credits. This may improve credit disparity in India to achieve an
equitable credit allocation. In this direction, the Reserve Bank of India advised commercial
banks to achieve a CD ratio of 60 per cent in rural and semi-urban branches separately on an all-
1
Recommendations of the Committee on Financial Inclusion (2008).
2
In this study we consider the CD ratio of scheduled commercial banks. This excludes loans given by state
cooperative banks and the rural infrastructure development fund (RIDF) extended by the National Bank for
Agriculture and Rural Development (NABARD).

2
India basis irrespective of regional balance.3 Further, State Level Bankers’ Committee (SLBC)
and District Consultative Committee (DCC) were given the responsibility to meet the advised
target in their Annual Credit Plan (ACP). In case the CD ratio falls below 40 per cent, Special
Sub-committee (SSC) of DCC monitors the progress. And if it falls below 20 per cent, additional
actions are taken on a special footing.
Deposits are major sources of funding for banks. As an intermediary, banks use these funds
to extend credits. At the country level, the CD ratio looks stable around 76.2 per cent, however,
there exists significant heterogeneity across states. Even after advice from the Reserve Bank of
India of maintaining a CD ratio of 60 per cent for each state, certain states in eastern and north-
eastern regions have persistently lower CD ratios. Since banks operate at the national level and
have the discretion of the use of deposits irrespective of state, deposits mobilised in a state can
be used to finance loans in another state. Banks optimally prefer an efficient allocation of their
funds by allocating them to relatively profitable and less risky sectors without any geographical
constraints. Although depositors are included in the formal banking sector in a state with a low
CD ratio, they may not reap the benefit of accessing formal finance for their borrowing needs.
It is natural to ask whether states that have credits higher than deposits are a source of a
major risk for banks. Deposits of a state broadly indicate the relative economic prosperity of that
state, but credits beyond these deposits might expose banks’ portfolios to a higher risk of runs.
For instance, Andhra Pradesh consistently has a CD ratio above 100 per cent, while the north-
eastern seven sisters have a CD ratio below 50 per cent. Assuming the rational behaviour of
banks, optimal credit allocation might be happening based on the risk profile of the borrowers.
Allocation of credits is the responsibility of banks, and they might be allocated to lower the
credit risk or maintain adequate collaterals while lending. In this study, we explain this disparity
with the support of the collateral channel. This channel explains that banks might be extending
loans to those states with households having higher liquid assets in their portfolio that can be
pledged as collateral. This lowers risk exposure for banks and minimises credit risk. We provide
statistical evidence in support of this relationship between the asset composition of households
and their credit offtake.
Next, we look at the demand for credit channel. Each state in India has a heterogeneous com-
bination of economic activities. They differ in infrastructure, economic activities, credit absorbing
capacity, socio-economic development, etc. Certain states have a higher agricultural share, some
have industry, and some have a rich environment for service-related activities. This need-based
credit demand can be a source of heterogeneous CD ratios across states (Herwadkar and Ghosh,
2013, 2015). This looks rational and sufficiently supports the efficient credit allocation, i.e.,
states with a higher need for credit get relatively higher credit. Even from a macroeconomic per-
spective, savings should be channelled to sectors that are efficient and have higher value addition
3
Master Circular – Lead Bank Scheme, Reserve Bank of India.

3
for generating growth and employment.
A major concern remains over equitable credit allocation. If states have credit requirements
for their economic activities and have limited access to avail it, then it demands adequate fo-
cus on equitable allocation of credits. Given the priority of policy-makers to provide formal
banking services, even some households with the ability to borrow find it very costly to avail it
(Pal and Laha, 2014). This may over time lead to inequitable credit allocation and inter-state
inefficient capital flight. This capital flight may not be completely unfair as long as the bank
is providing timely liquidity service. As in the design of a deposit contract, a depositor can
withdraw their deposits at any time. Credits are additional funds demanded by the borrowers
over deposits based on their economic needs. Information asymmetry and the non-availability of
liquid collaterals with the majority of households may be a source of this inequity, particularly
in the segment of personal and agricultural loans. The southern part of India gets a significant
chunk of it, and this study tries to explain possible reasons that led to such an asymmetry with
the support of collateral channels.
Self-Help Groups (SHGs) in the southern part of India are relatively well-developed and
almost get three-fourths of total credits are extended to SHGs in India (Figure 4). Andhra
Pradesh and Tamil Nadu are the states that get a significant share in southern India. A higher
improvement rate and density of SHGs helps them in getting higher credit (Muduli and Sharma,
2022). Therefore, we also augment our analysis and highlight the role of SHGs credits, which
might be a factor behind this CD ratio disparity.
This study draws close attention to this important trade-off between efficiency and equity
in credit allocation. First, it provides a few stylised facts on the CD ratios of states in India
and households’ indebtedness. Second, it explains the role of the availability of liquid collaterals
for higher CD ratios in the southern part of India that comes from agricultural and personal
loans. Third, we estimate the impacts of different state-specific factors that generate demand for
credit and the role of banking infrastructure in improving the CD ratio. These factors include
net per capita net State Domestic Product (NSDP) at constant price, road density, per capita
power availability, and state’s share of credit extended to Self-Help Groups (SHGs). Our results
show that states with a higher share of valuables (gold and other precious metals) in their assets,
that they can pledge as collateral, have easy access to personal loans. This relationship is more
pervasive in the southern part of India. The higher availability of bank branches helps in the
mobilisation of deposits and extending credits to a certain extent. States that contribute more
to national industry value addition demand more industrial credits, which leads to a higher CD
ratio of states in the western and central parts of India. A similar relationship is also evident in
the case of agricultural loans.
The details of the study have been structured in the following sections. Section 2 broadly
sheds light on literature that highlights financial inclusion from the perspective of the CD ratio,

4
its role in economic development, and disparity across states. Section 3 elaborates on the data
used for the empirical analysis and empirically establishes two channels: the collateral channel
and the credit demand channel to explain the disparity in CD ratio across states. Section 4
concludes the study based on results drawn from the empirical exercises in the previous sections.

2 Related Literature
Financial inclusion, the act of providing banking services and credit at an affordable cost to
the unbanked and disadvantaged section of society, is crucial for the inclusive growth of an
economy. It is a “quasi-public good” that broadly satisfies the conditions of non-rivalry and
non-excludability (Kelkar, 2010). Another major advantage of financial inclusion is, it helps
households in managing risks such as unfavourable weather, natural disaster, health issues, etc.
Moreover, it helps in getting timely and lower cost credits compared to those traditional money
lenders who charge exorbitantly high-interest rates. This reinforces overall economic develop-
ment by extending credit to micro-entrepreneurs and rescues households at bottom of the pyra-
mid from the vicious circle of poverty (Banerjee, 2003; Sharma and Bardhan, 2017). A greater
degree of financial inclusion has a strong correlation with human development across countries
(Nanda and Kaur, 2016).
The credit-to-deposit ratio of a state is a banking performance indicator that shows the flow
of credit to that state vis-à-vis its mobilised deposits. Over decades, the overall CD ratio has
improved, and its position in the ranks of states remained almost the same (Das and Das, 2019).
However, there exists a greater disparity in CD ratios across regions in India. Kumar (2013)
finds, the state’s income level, banking penetration, and socio-economic factors are major drivers
of credits and deposits. The study did not find any evidence in supporting the gaps across
states in India. Kurian (2000) highlights higher CD ratios in economically advanced states and
persistently low in the case of other states. Thus, states with higher CD ratios get a higher
share of total credits disbursed at the national level (Das and Dinda, 2014). Sethi and Bajaj
(2013) find higher CD ratio in states of India is associated with higher income, higher share
of non-primary sectors in the state’s income, and low population density. Ashok et al. (2019)
draw attention to the north-eastern region of India and highlight the financial infrastructure
laggings faced by the states in these regions. They suggest providing more banking services to
improve the flow of credits. For eastern regions, a district-level study covering districts under the
aspirational districts programme (ADP) by Balachandran and Gupta (2023) find that there is a
significant divergence in CD ratios of these districts and finds branch creation helps in improving
the CD ratio. Sharma and Bardhan (2017) show that regional financial development facilitates
investment and improves overall economic development.
Another avenue that may be responsible for the disparity in the CD ratio is credit delivery

5
through the SHG-bank linkage programme. The programme has been a major vehicle in de-
livering formal banking services and extending credit to rural households, particularly women
(Nair and Tankha, 2013). Recent studies find, SHG has led to the formalisation of the rural credit
market and increases formal credits with a lower cost of borrowing (Hoffmann et al., 2021). The
southern part of India has very low credit defaults and absorbs more than three-fourths of the
total credits extended to SHGs (Muduli and Sharma, 2022). This further adds to the high CD
ratio in the southern part of India. In other parts of the country, SHGs are being organised,
however, their credit offtake capacity depends on their maturity and gradation.4 A better grad-
ing helps SHGs to access higher credits and use them for productive investment. This empowers
members of the SHG and helps in saving and consumption decision-making (Esmaeil Zaei et al.,
2018).
In the literature, the CD ratio has been used as a banking performance indicator to gauge the
extent of financial inclusion (Chakraborty and Chakraborty, 2018; Sharma and Bardhan, 2017).
In this study, we identify factors that determine CD ratio and disparity among states. Besides
state-specific factors, we explain the variation in CD ratio based on household asset composition
and penetration of SHGs. This study adds to the literature on financial inclusion in India and
inclusive economic development.

3 Empirical Analysis
3.1 Data

For the collateral channel, we use the secondary survey data published by the National Statistical
Office (NSO), Ministry of Statistics and Programme Implementation survey on All India Debt
and Investment Survey (AIDIS) during the period January – December 2019 as a part of the
77th round of the National Sample Survey (NSS). The survey covered 5,940 villages with 69,455
households in rural areas, and 3,995 blocks covering 47,006 households in urban areas. This data
contains household-level information on debts - borrowing sources, borrowing amount, etc. and
investments - physical, financial, valuables, etc. The survey provides state-wise data for both
rural and urban areas. In rural areas, it separately provides aggregate data for cultivators and
non-cultivators, and in urban areas for self-employed and others. This data is useful and provides
insightful shreds of evidence on the asset composition of households. We use this information
to examine the relationship between liquid assets that can be pledged as collateral, household
indebtedness, and the CD ratio.
The study uses state-level data published by the Reserve Bank of India in the Handbook of
4
Gradation is a process in which an external financial and other institutions grade the quality of SHGs. The
gradation of a SHGs enables to identify their strengths and weaknesses, and facilitates interventions for their
further improvement.

6
Statistics on Indian States for examining demand for credit channels. The sample in the study
considers a set of state-specific banking, infrastructure, and macroeconomic variables from 2011-
12 to 2020-21 (end of march). The analysis has been carried out using the balanced panel data
with the state as its panels. A description of the variables has been provided in Table 7. For state-
wise SHGs credit information, the study uses secondary data available in Status of Microfinance
in India, disseminated by the National Bank for Agriculture and Rural Development (NABARD).
We try to explain the factors that determine the CD ratio of states. For this purpose, we use
two kinds of variables. First, the banking sector development is represented by the number of
bank branches per one lakh of the population. Second, a development indicator is represented
by the first principal component of per capita NSDP, road density, and power availability.

3.2 Stylised Facts

The CD ratio across the regions (as classified in Table 5) has remained almost divided in the
last decade. Southern, western, and northern regions have CD ratios above the national average,
while eastern, north-eastern, and central regions accessed credits only half of their deposits,
which is below the target of 60 per cent advised by the Reserve Bank of India (Figure 1a). This
raises concern over the disbursement/allocation concentration of credits in certain parts of India.
However, the concentration of credits and deposits measured by the Herfindahl-Hirschman index
(HHI) has been moderated since 2016.5 The dispersion also has shown a moderating sign after
a pick in 2019.
Certain states in the southern region of India have credits higher than the deposits. These
exorbitant CD ratios are particularly in the segment of personal and agricultural loans (Figure 5).
The western and northern parts of India have a higher share of industry credits. It seems as if the
western half of India almost gets a higher preferential credit. From the development perspective,
these states parts of India also have higher per capita Net State Domestic Product (NSDP).
The CD ratio is based on the deposits and credits of the scheduled commercial banks. An
investigation using secondary survey data published by the Ministry of Statistics and Programme
Implementation (Government of India) shows that the incidence of household debt in the southern
part of India dominates compared to other parts of India. Rajasthan in the northern part
and Madhya Pradesh in the central part show a relatively higher incidence of indebtedness.
Indebtedness in rural areas is higher compared to urban areas. Indebtedness in Andhra Pradesh,
Telangana, and Kerala is high both in rural and urban areas. This evidence are providing
sufficient support for the need of explaining higher personal and agricultural loans in the southern
part of India.
5
Pn
The HHI measure, defined by HHI = i=1 s2i , (where si is the share of entity i) estimates concentration
for entities that are equally probable of being allocated credits. Since states vary in areas and population, we
interpret the HHI of credits and deposits relative to the HHI of population.

7
 Figure 1: Credit to Deposit Ratios in India
(a) CD Ratio Across Regions (b) Regional Disparity of CD Ratios
120 0.17
CD Ratio (in per cent)

100 0.15 25
80 0.13
20
0.11
60
0.09 15
40
0.07
20
RBI Advice 10
0.05
0 0.03 5

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022
Northern North-Eastern Eastern HHI - Deposits HHI - Credits
Central Western Southern
All India
HHI - Population Std Dev. of CD Ratio (RHS)

Sources: Reserve Bank of India and authors’ estimates.

From the business regulation perspective, states with a lower rank in ease of doing business
ranking are more likely to have lower CD ratios. The ease of doing business broadly indicates the
ecosystems that help in initiating and operating businesses. It provides easy access to finance,
quick enforcement of contracts, acquisition of land, tax incentives, resolving insolvency, etc.,
which creates a conducive environment for businesses. These overall supports provided by the
state help in credit development, leading to a higher CD ratio. The pictorial evidence in Figure 6
strongly supports the conjecture. Andhra Pradesh, the state with an extraordinarily high CD
ratio, is positioned in the first rank in the ease of doing business ranking. And the scatter plot
for all states for four years shows a similar pattern of positive association. Thus, this graphically
concludes, states that have a relatively better business ecosystem are more likely to have a higher
CD ratio.
In the next sections of this study, we provide two channels - 1) the collateral channel, and 2)
the demand for credit channel. The collateral channel relatively helps in explaining a higher CD
ratio and indebtedness in the southern region that has higher personal and agricultural loans.
The demand for credit channels explains the role of the overall role of economic and financial
development indicators for higher CD ratios across states.

3.3 The Collateral Channel

This channel shed light on a few reasons that could be responsible for the higher CD ratio in
the southern part of India that dominates the personal and agricultural loan segments. Personal
loans had a share of 24.3 per cent in 2011-12 and rose to 40.9 per cent in 2020-21, at the same time
agriculture loans almost remained stable at around 21.1 per cent (Figure 9). In total, these two
components constitute nearly 60 per cent of total loans. Therefore, we provide special attention
to these segments and explain them through the collateral channel.
Banks are responsible for use of deposits while they are extending a certain part of the

8
 Figure 2: Incidence of Indebtedness (IOI) in India
(a) Rural
(b) Urban

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IOI (in per cent) IOI (in per cent)

3.1 67.2 5.1 47.8

Note: The Incidence of Indebtedness (IOI) of the state refers to the percentage of indebted households. This
includes both institutional and non-institutional debts.
Sources: Ministry of Statistics and Programme Implementation (Government of India).

liability. The majority of households do not have hard information about their financial health
that could be verified by the banks while sanctioning loans. For that, banks demand collaterals
that they can liquidate in the case of default. This contract reduces loss given the default of
the credit exposure and helps banks in the extension of credits in the absence of financial hard
information.
In India, households allocate their assets in several categories. In the All India Debt and
Investment Survey 77th round (surveyed during 2019), the assets are classified into four categories
- physical assets, financial assets, valuables, and shares of companies. Physical assets consist of
land, building, livestock and poultry, agricultural machinery and equipment, non-farm business,
transport equipment, etc. Financial assets consist of cash in hand, deposits, pension funds, life
insurance, etc. Valuables consist of gold jewellery, gems and precious stones etc. Certain assets
are highly liquid such as bank deposits, buildings, valuables, etc., that can be considered by banks
for extending loans. Mizoram and Andhra Pradesh states have a higher share of financial assets
and most households save in deposits. One unique feature in the assets composition of Andhra
Pradesh is a higher share of financial and valuables, that are highly eligible for collaterals. A
strong correlation between the CD ratio and the share of valuables in total assets indicates the
states with a higher share of valuables in their portfolio get higher credits relative to the deposits
(Figure 3). In states, particularly in rural areas, households with less cash and more deposits
partially reap the benefits. This is further supported by the evidence on debt to total assets
ratio and share of valuables, particularly in southern states (Figure 7). Investment in valuables

9
helps in easy credit access and helps individuals borrow to meet personal needs.
Looking into agricultural loans, we scatter plot the state-wise share of assets holding in lands
to total assets and share of the agricultural loan of that state (Figure 8). Although positive,
we did not find a very strong statistically significant correlation in the case of agricultural loans
in comparison to personal loans. Gold, jewellery, and other precious metals are relatively more
liquid than land, and banks also ask borrowers to keep these valuables in their vaults. This helps
them easily access and liquidation compared to land, a relatively illiquid asset that becomes very
costly for banks while liquidating in the process of recovery. Therefore, valuables provide greater
access to credits than lands. It would have been more robust if we could have established the
relationship using more frequent observations over time. With this limitation on data availability,
the above pictorial shreds of evidence suggest that valuables and lands help households to access
personal and agricultural loans. This establishes the presence of collateral channels which might
be responsible for the disparity in personal and agricultural loans across states.

Figure 3: Valuables and CD Ratio

(a) Rural (b) Urban

160 160
140 140
120 120
100 100
80 80
60 60 Correlation = 0.66
40 Correlation = 0.58 40 p-value = 0.0001
p-value = 0.0007
20 20
0 0
0 2 4 6 8 10 12 0 2 4 6 8 10
Share of valuables in total assets (in per cent) Share of valuables in total assets (in per cent)

Sources: Reserve Bank of India, Ministry of Statistics and Programme Implementation, Government of India,
and authors’ estimates.

3.4 Demand for Credit Channel

In the previous section, we provided a few graphical evidence to explain the higher CD ratio
in the personal and agricultural loan segment using household-level survey data. This section
primarily focuses to explain the role of economic development that creates demand for credits,
availability of banking services, and the presence of SHGs, which leads to a higher CD ratio in
certain states. In 2011-12, the industry loans constituted a share of 56.7 per cent, over time, it
declined to a level of 36.8 per cent in 2020-21 (Figure 9). This section primarily focuses on this
aspect along with the agriculture sector.
In the first empirical specification, the CD ratio is explained using bank branch availability

10
and the state’s development indicator (DI). We estimate the following dynamic panel equation,

CD Ratioit = α+ρCD Ratioit−1 +βBank Availabilityit−1 +γDIit−1 +ψSHG Loan Shareit +si +ϵit
(1)
where “Bank Availability” stands for the number of bank branches per one lakh population, “DI”
stands for the development indicator derived from the first principal component of per capita
NSDP, road density, and power availability that captures 61.8 per cent of the total variation,
and si is an unobserved state-specific fixed effect. The first explanatory variable captures the
availability of formal banking and the second explanatory variable indicates the economic and
infrastructural development of the state. The third variable, “SHG Loan Share” share of out-
standing loans of a state to total outstanding SHG loans at the national level. This is a proxy
for SHG development and extension of credit through the SHG as a microfinance institution.

Table 1: Dynamics of CD Ratio

(1) (2) (3) (4)

CD Ratioi,t CD Ratioi,t CD Ratioi,t CD Ratioi,t
CD Ratioi,t−1 0.966∗∗∗ 0.934∗∗∗ 0.818∗∗∗ 0.820∗∗∗
(0.00170) (0.00825) (0.0227) (0.00907)

Bank Availabilityi,t−1 -0.0192 -0.627∗∗∗ -0.352∗∗∗ -0.361∗∗∗

(0.0137) (0.0435) (0.0580) (0.0612)

SHG Loan Sharei,t 0.279∗∗∗ 0.317∗∗∗ 0.739∗∗∗ 0.506∗∗∗

(0.00765) (0.0213) (0.0968) (0.190)

DIi,t−1 2.492∗∗∗ 2.102∗∗∗ 1.738∗∗∗

(0.149) (0.427) (0.291)

Bank Availabilityi,t−1 × DIi,t−1 -0.0110

(0.0105)

Bank Availabilityi,t−1 × SHG Loan Sharei,t 0.0200∗∗

(0.00837)

Constant 0.961∗∗∗ 10.51∗∗∗ 12.19∗∗∗ 12.13∗∗∗

(0.300) (0.957) (1.157) (0.612)
Observations 261 261 261 261
AR(1) test p-value 0.000972 0.00106 0.00128 0.00147
AR(2) test p-value 0.117 0.160 0.136 0.139
Hansen test p-value 0.316 0.246 0.936 0.939
Standard errors in parentheses
∗
p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

We estimate the above specification using two-step GMM as suggested in Arellano and Bond
(1991). Results reveal that states with higher banking availability and lower development have
lower CD ratios (Table 1). These banking availability results look somehow contradictory with
the expectations. As discussed in the introduction, bank availability helps in the mobilisation of
savings in form of deposits, but not in the extension of credits. Extending credits requires more

11
hard information to assess creditworthiness, which is relatively more opaque in the case of less
developed states. This lowering of credits and improvement in the deposit base results in a lower
CD ratio.
Table 2: Mobilisation of Deposits and Extension of Credits

Per capita Per capita Per capita Per capita

Depositsi,t Depositsi,t Creditsi,t Creditsi,t
Bank Availabilityi,t−1 6.199∗∗∗ 0.528 -0.681 -0.904
(1.351) (1.031) (0.661) (0.712)

DIi,t−1 25.14∗∗∗ -14.13∗∗∗ 17.14∗∗∗ 15.60∗∗∗

(4.004) (3.882) (1.959) (2.681)

Bank Availabilityi,t−1 × DIi,t−1 1.537∗∗∗ 0.0604

(0.104) (0.0716)

SHG Loan Sharei,t 1.268 0.459 -0.424 -0.456

(0.865) (0.616) (0.423) (0.425)

Constant 5.838 40.95∗∗∗ 50.72∗∗∗ 52.10∗∗∗

(15.00) (10.89) (7.337) (7.522)
Observations 261 261 261 261
Overall R2 0.793 0.767 0.404 0.386
State fixed effect Yes Yes Yes Yes
Year fixed effect Yes Yes Yes Yes
Standard errors in parentheses
∗
p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

Along with banking and economic development, the availability of micro-credits through
SHGs was found to be a major vehicle in India after the SHG-Bank linkage programme in 1992.
Southern states in India have well-developed SHGs in rural and urban areas. States with a higher
share of SHG credits have a higher CD ratio. Moreover, along with higher SHGs credit share,
the availability of banking services results in a higher CD ratio of the states.
We further establish the relationship separately for deposits and credits. We derive the per
capita deposits and credits of a state and examined the relationship. The above two derived
variables are found to be non-stationary, instead of using a dynamic panel we employed a fixed
effect model considering both state and year fixed effects. The equations are specified by:

Per Capita Depositsit = α + βBank Availabilityi,t−1 + γDIi,t−1 + si + vt + ϵit (2)

Per Capita Creditsit = α + βBank Availabilityi,t−1 + γDIi,t−1 + si + vt + ϵit (3)

where vt is the unobserved time fixed effect. Results very clearly communicate that states with
higher bank availability and economically developed have higher per capita deposits (Table 2).
The interaction coefficient very strongly reveals the same. However, the results for credits are
different. States with higher banking service availability have lower per capita credits. However,

12
if the state is economically prosperous, it improves per capita credits. Therefore, the previous
empirical pieces of evidence suggested that states with higher bank availability might have lower
CD ratios.
Table 3: Demand for Industry Loans
(1) (2) (3)
log(Industry Loans)i,t log(Industry Loans)i,t log(Industry Loans)i,t
log(Industry Loans)i,t−1 0.727∗∗∗ 0.806∗∗∗ 0.796∗∗∗
(0.0210) (0.0227) (0.0217)

Banking Availabilityi,t−1 0.0134∗∗∗ 0.00549∗∗ -0.00809∗∗∗

(0.00478) (0.00239) (0.00207)

Industry GVA Sharei,t 0.250∗∗∗ 0.173∗∗∗ 0.600∗∗∗

(0.0307) (0.0155) (0.0677)

DIi,t−1 0.0344∗∗ 0.0138 0.0734∗∗∗

(0.0140) (0.0117) (0.0111)

Industry Intensivei,t 0.0145∗∗∗ 0.0263∗∗∗

(0.00345) (0.00459)

Industry GVA Sharei,t × Industry Intensivei,t -0.0153∗∗∗

(0.00220)

Constant 1.613∗∗∗ 0.848∗∗∗ 0.821∗∗∗

(0.130) (0.193) (0.135)
Observations 261 261 261
AR(1) test p-value 0.0581 0.0575 0.0551
AR(2) test p-value 0.428 0.381 0.390
Hansen test p-value 0.266 0.525 0.643
Standard errors in parentheses
∗
p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

Proceeding further with the evidence on per capita credit, we examine the disaggregate level
of loans to industry and agriculture. Two aspects of a state are considered for examining the
sectoral credit offtake. First, the industry GVA share defined as the share of industry GVA of
the state in national total industry GVA. This indicator reflects the contribution of the state
relative to other states in GVA and its demand for industrial credit. Higher its share, that may
lead to higher relative demand for industry credit. Second, the industry intensity, defined as the
share of industry GVA of the state in its total GVA. If a state is dominated by industry, then also
its relative demand for credit may be high compared to other sectors. Both the first and second
indicators complement each other in credit demand. We employ a dynamic model framework to
estimate the relationship. As expected, higher banking service availability, Industry contribution
in national, and industry intensity of the state have higher credit offtake (Table 3). The coefficient
of the interaction term is negative and statistically significant. This identifies states with higher
contribution but lower intensity as major drivers of industry credit. For instance, states like Uttar
Pradesh, Karnataka, West Bengal, and Maharashtra contribute significantly to India’s industry
GVA, but their share of industry in their respective state’s GVA is relatively less compared to
other states. While states like Tamil Nadu and Gujarat have both high share and intensity that

13
 Table 4: Demand for Agriculture Loans

(1) (2) (3)

log(Agri Loans)i,t log(Agri Loans)i,t log(Agri Loans)i,t
log(Agri Loans)i,t−1 0.788∗∗∗ 0.774∗∗∗ 0.823∗∗∗
(0.0132) (0.0998) (0.0298)

Bank Availabilityi,t−1 0.00599 0.00698 0.00549

(0.00431) (0.0164) (0.00905)

Agri GVA Sharei,t 0.185∗∗∗ 0.263∗ -0.0158

(0.0148) (0.142) (0.0525)

DIi,t 0.0525∗∗∗ 0.108∗∗ 0.00287

(0.0107) (0.0527) (0.0206)

Agri Intensivei,t 0.0362∗ -0.0461∗∗∗

(0.0203) (0.00619)

Agri GVA Sharei,t × Agri Intensivei,t 0.0129∗∗∗

(0.00321)

Constant 1.333∗∗∗ 0.751 1.733∗∗∗

(0.0526) (0.643) (0.179)
Observations 260 260 260
AR(1) test p-value 0.0432 0.0177 0.0311
AR(2) test p-value 0.795 0.848 0.575
Hansen test p-value 0.637 0.710 0.230
Standard errors in parentheses
∗
p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01

leads to higher industry credit in an absolute sense.

In the case of agriculture, the story is a little different. Here, states with both a share
of agriculture and intensity have agricultural credits (Table 4). Unlike industry, the offtake is
higher when the state has both indicators on the higher side. These include the state of Andhra
Pradesh, Uttar Pradesh, Rajasthan, Maharashtra, Madhya Pradesh, etc., particularly states
from the southern, central, and western parts of India.
With the above empirical analysis on demand for credit channels, results conclude that states
that major contributions in respective sectors have a higher demand for use in those sectors.
States in western and central regions are major contributors to industry GVA and industry
credit is around half of the total credits, therefore the demand for a higher industry credit may
be responsible for the higher CD ratio in states in western regions.

4 Conclusion
The paper attempts to explain the disparity in the CD ratio across States in India. While the
concentration in deposit mobilisation has moderated in the recent period due to higher financial
inclusion, similar evidence is not entirely visible for credit, explaining the disparity in CD ratios

14
across States.
We further attempt to explain this disparity using two channels: a) the collateral channel,
and; b) the credit demand channel. Under the collateral channel, States where households
have a higher share of valuables (gold jewellery, gems and precious stones, etc.) in their asset
composition, have higher personal and agricultural loans leading to higher debt relative to their
assets. As valuables are relatively more liquid and can be pledged as collaterals, this reduces the
loss given default of banks and helps households in accessing credit. Furthermore, improved ease
of doing business, and a higher share of SHG credit when interacted with banking availability in
a given State help in enhancing the credit access. Although credit to SHGs accounts for a small
share of total bank credit, given the grassroot connect of these institutions, they can influence
the borrowing and repayment culture in a State. Given the limitations in the existing secondary
data, the presence of this channel can be taken as indicative at this stage. It can be substantiated
using a more comprehensive primary dataset as part of future research.
Under the credit demand channel, higher per capita income, road connectivity, availability
of power, and banking service availability, lead to higher demand for credit, resulting in a higher
CD ratio. States with higher contributions to national industry GVA have a higher demand for
industrial loans. Also, States having a higher share of industrial GVA in their respective GVA
have a higher demand for industrial credit. Similar evidence also exists in the case of agricultural
loans.

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Table 5: Region Classification of Indian States

Region States
Central Chhattisgarh, Madhya Pradesh, Uttar Pradesh, Uttarakhand.
Eastern Bihar, Jharkhand, Odisha, Sikkim, West Bengal.
North Eastern Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Tripura.
Northern Haryana, Himachal Pradesh, Jammu & Kashmir, Punjab, Rajasthan.
Southern Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, Telangana.
Western Goa, Gujarat, Maharashtra.
Note: The above classification is based Handbook of Statistics on Indian States, Reserve Bank of India.

Figure 4: Region-wise SHGs Outstanding Loan Share

100

80
(in per cent)

60

40

20

0
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Central Eastern North Eastern

Northern Southern Western

Sources: NABARD and authors’ calculations

17
 Figure 5: Credit Allocation in Different Regions

(a) Industry (b) Agriculture

100.0 100.0

80.0 80.0

60.0 60.0

40.0 40.0

20.0 20.0

0.0 0.0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Northern North-Eastern Eastern Central Western Southern Northern North-Eastern Eastern Central Western Southern

(c) Personal

100.0

80.0

60.0

40.0

20.0

0.0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Northern North-Eastern Eastern Central Western Southern

Sources: Reserve Bank of India and authors’ estimates.

Figure 6: Ease of Doing Business and CD Ratio

140
120
100
Correlation= - 0.39
p-value < 0.0001 80
60
40
20
0
40 30 20 10 0
Ease of Doing Business Rank

Note: In the above plot, ease of doing business rank has been considered for years 2015, 2016, 2017, and 2019
and the CD ratio of the corresponding year.
Sources: Reserve Bank of India.

18
 Table 6: Share of Valuables and CD Ratio

Region Share of Valuables in Total Assets (in per cent) CD Ratio (in per cent)
Rural Urban
Central 2.2 2.4 56.1
Eastern 3.0 2.1 42.2
North Eastern 1.3 1.2 43.9
Northern 2.0 2.5 53.8
Southern 5.5 4.9 95.5
Western 2.0 2.1 61.8

Figure 7: Valuables and Household Debt

(a) Rural (b) Urban

12 10
Andhra
9 Pradesh
Andhra Kerala Telangana
10 Pradesh 8
7 Kerala
Telangana
8 6
5 Tamil Nadu
6
Karnataka Tamil Nadu
4 Karnataka
4 3
2 Correlation = 0.68
Correlation = 0.71 p-value < 0.0001
2 p-value < 0.0001 1
0
0 0 2 4 6 8
0 2 4 6 8 10
Share of valuables in total assets (in per cent) Share of valuables in total assets (in per cent)

Sources: Reserve Bank of India, Ministry of Statistics and Programme Implementation, Government of India,
and authors’ estimates.

Figure 8: Investment in Land and Agricultural Loan

(a) Agricultural Loans (b) Personal Loans

14 25
12
20
10 Correlation = 0.44
p-value = 0.0146
Correlation=0.16 15
8 p-value = 0.4103
6 10
4
5
2

0 0
40 60 80 100 0 2 4 6 8 10
Share of Land in Total Assets (in per cent) Share of Valuables in Total Assets (in per cent)

Sources: Reserve Bank of India, Ministry of Statistics and Programme Implementation (Government of India),
and authors’ estimates.

19
 Figure 9: Sector-wise Loan Share

100
90
80
70
(in per cent)
60
50
40
30
20
10
0
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
Agriculture Industry Personal

Sources: Reserve Bank of India

Table 7: Definition of Variables

Variable Definition
Road density Length of national highways divided by the area of the state.
Power availability Availability of power (in crore units) divided by the population.
Bank availability Number of branches per one lakh population.
Industry GVA share Industry GVA divided by national GVA (in per cent)
Industry intensive Industry GVA divided by state GVA (in per cent)
Agri GVA share Agriculture GVA divided by national GVA (in per cent)
Agri intensive Agriculture GVA divided by state GVA (in per cent)
DI Development indicator (DI) is derived from the first principal com-
ponent of per capita NSDP (at constant price), Road density, and
power availability.
SHG loan share Outstanding loans to self-help groups (SHGs) in a state divided
total SHGs loans in India.
Per capita deposits Total deposits of state divided by the total population of the state
(in thousands)
Per capita credits Total credits extended to the state (based on utilisation) divided
by the total population of the state (in thousands)

20

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