Corporates For Banking

Capital is a critical input in production. Bank credit, which accounts for more than 60% of domestically sourced financial flows to the commercial sector, remains the largest single source of this input in India.

- Arvind Panagariya and Rajeev Mantri

But the quantum of bank credit remains woefully inadequate. In 2018, domestic credit to the private sector by banks as a proportion of GDP was just 50% in India. In comparison, the proportion was 158% in China, 141% in South Korea, 112% in Thailand, 81% in Chile, 66% in South Africa, and 61% in Brazil.

The importance of enhancing the availability of bank credit for achieving the objective of a $5 trillion economy, while creating well-paid jobs for India’s currently underemployed workers, cannot be overstated. India needs medium and large-scale enterprises, capable of capturing a significant share in the global export market, to emerge in labor-intensive sectors such as apparel, footwear, furniture, toys, and a host of light manufactures. While the government has executed important reforms such as a reduced corporate profit tax and new labor codes, much needs to be done to augment the availability of bank credit.

In this context, the bold and creative suggestions in the November 2020 report of the Internal Working Group (IWG) of the RBI assume great importance. Sadly, however, much of the commentary on the report has been negative, principally focussing on its recommendation to allow the entry of corporate houses as promoters of banks. Before we take up these criticisms, we consider the positive case for the IWG recommendation.