An Empirical Study on Industrial Credit Portfolio of Banking Sector in India - During Post Reforms Era

Abstract

As result of four decades of closed economic policies, India undergone into deep Balance of Payment crisis in 1990. To come out of this crisis India opened its economy by integrating with other world economies. As part of integrating its economy with world economy it liberalized strict regulations, invited private people to play significant role in economy development and permitted global players to participate and enhance domestic efficiency. Along with economic reforms, banking sector was also liberalized, privatized and globalized which led to increased competition in the industry. This led to sanction of credit to industrial sector liberally which means on the basis poor standard credit policy. As result of free bank credit outflow to industrial sector, the industrial sector has grown significantly during 2000-2007, but sub-prime crisis in 2007 strongly hit the demand for Indian business products. Consequently their earnings fallen since ever. This phenomenon increased debt burden on corporate balance sheet ,as result, In 2016 they failed in repayment their dues which increased Non-Performed Assets in Banking sector. The increased stress on banking assets caused increase in allocation of major portion of profits for writing off these NPAs. The impact of heavily loaded corporate balance sheets with debts on the Assets of banks balance sheets called as “Twin Balance Sheet” problem. Therefore, in the present study we examined the banks industrial credit portfolio over twenty five years of post reforms period. The analysis of banks credit flow to industrial sector has done into five phases (each five years) through using growth and percentages. This study found that banks industrial credit portfolio is dominated by six sectors only namely infrastructure metal, textile, chemical, engineering and food processing industries which account three-fourth the total bank credit to industrial sector over study period. Due to allocation of huge funds on few sectors banking sector was exposed to huge default risk which led to corporate debt crisis in 2016. Therefore, we suggested credit risk diversification by expansion of credit to other essential and profitable sectors in the economy.