Chapter-6

FACTORS AFFECTING BANK CREDIT IN INDIA

Banks deploy credit as per their credit or loan policy. Credit policy of a
bank, basically, provides a direction to the use of funds, controls the size
and composition of the loan portfolio and also influences credit decisions of
a bank. A systematic credit policy helps a bank in attaining its goals and at
the same time serving public at large. Banks require a clear-cut credit policy
to conduct its lending business in an orderly and safe manner so that its
loan portfolio remains balanced in terms of size, type, maturity, security
thereby providing steady earnings. Banks also have a social obligation of
meeting diverse credit needs of various sections of the community, but it
cannot afford to lend funds universally and incur losses. So, banks have to
frame an appropriate credit policy. The policy formulators in a bank must be
cautious in framing its credit policy as lending activity of banks affect both
the bank and public at large. There are several factors that influence banks‟
credit policy thereby affecting credit deployment of funds by the banks. So,
banks must consider such factors that are likely to influence the credit
policies of a bank and its credit deployment. The present chapter is an
attempt to study the factors affecting bank credit and also analyses selected
factors in various bank groups in India affecting their credit deployment.

6.1 PRINCIPLES OF LENDING

Major source of funds for lending comes through deposits, so banks

must assure about the security of funds. Customers can anytime demand
their deposits lying with the bank and banks are expected to honour their
request. So, banks should follow certain principles of lending. These are
safety, liquidity, security, diversification of risk, purpose, profitability and
policy validation.

1. Safety: The safety of the fund is the most important principle of

lending. Banks should take the calculated risk and ensure that the
funds lent to the borrowers must be repaid by the borrowers in time.

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2. Liquidity: Liquidity means the ability of the bank to convert the
asset into cash. Banks are not allowed to lend the whole deposits of
the customers lying with the banks. They have to keep their sizable
proportion of deposits with the RBI in the form of CCR; and another
portion should be invested in approved securities in the form of SLR,
so that they can honour the demands made by the depositors.

3. Security: Here, security refers to „collateral security‟. In case of

higher risk, banks are required to take extra security in the form of
any collateral security, viz. immovable property, shares, government
approved securities, etc. Banks can sell the collateral security in case
of default by the customer in the repayment of loan and can recover
the lent amount. But this action will be taken as a last resort after
taking all other steps.

4. Diversification of Risk: Banks should not lend the entire funds to

particular individuals or for one type of industry. The banks should
diversify the advances. The diversification means spreading of funds
over a large number of borrowers over different maturity periods. It
helps in minimizing the risk inherent in grants of loan.

5. Purpose of Loan: While granting the loans, banks should ensure

about the purpose of loan. If the loan is given for productive purposes
then it will be repaid by the borrowers from their earnings, but if the
loan is granted for unproductive purposes or for some other
speculative purposes then it may result into default because of
inability of the borrower. So, banks must enquire about the purpose of
loan.

6. Profitability: Banks have to make sufficient income to pay the

interest on deposits as well as bear administrative expenses. The main
income of the bank is the difference between the lending and the
borrowing rate. But the banks should not make profits on the cost of
safety and liquidity of the loans.

7. Policy Authentication: The lending should be refrained with:

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 (i) RBI‟s credit policy.

(ii) Bank credit policy and various product specific parameters.

(iii) Lending should not be opposed to national policy.

(iv) Lending to national priorities sectors, viz. loans to priority sectors,

export at concessional rate of interest.

6.2 FACTORS AFFECTING BANK CREDIT

There are numerous factors that influence the credit policy of a bank.
There are also certain factors that are considered in credit analysis of an
applicant that affect credit deployment of a bank. The factors affecting bank
credit have been categorized as general factors and credit analysis factors.

A. General Factors

These are the factors that influence and determine the credit policy of
a bank. These include:

1. Capital Position: The capital position of a bank is an important

factor influencing its credit policy. The capital of a bank serves as a
cushion against losses which may arise in future. A bank with a
strong capital base can afford to take more risk in lending than
banks with a lower capital base. Banks with large capital structure
can afford to follow a liberal lending policy and provide different
types of loans which can be a difficult task for banks with weak
capital position. Further, capital adequacy norms also determine
the amount of risk assumed in lending operations.

2. Earnings Requirement: Earnings are essential for the successful

operations of a bank. Banks, usually, consider earnings as an
important factor in determining its credit policy. Banks with
income as the primary objective in their lending policies, will follow
an aggressive policy which may include providing large amount of
term or consumer loans which are normally made at a higher rate
of interest due to high risk involved in them. But fulfilling the
objective of profitability banks should not take undue risks and

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 maintain more liquid secondary reserve or include securities with
shorter maturity periods and less credit risk in investment
account.

3. Variability of Deposits: Fluctuations in deposits influence the

loan policy of a bank. Banks experiencing wide fluctuations in
deposits or declining deposits will follow a conservative lending
policy and cannot take risk of making term loans. Whereas banks
with stable and growing deposits can afford to be more liberal in
their lending policy and take more chances with loans.

4. State of Economy: The economic conditions of an area being

served also have a significant bearing on banks‟ credit policy. A
bank operating in an area experiencing seasonal and cyclical
fluctuations cannot afford to have a liberal lending policy, whereas
stable economy is conducive to a liberal lending policy as
possibility of fluctuations in the level of deposits and loan demands
is limited. Banks should also consider national economy as the
factors affecting nation as a whole may eventually affect local
conditions.

5. Monetary Policy: The lending policy of a bank has relationship

with the monetary policies framed by the central bank. The
monetary policy determines the lending capacity of banks by
bringing variations in cash reserve ratio (CRR) and statutory
liquidity ratio (SLR) requirements. The availability of deployable
funds with the banks depends on the monetary policy. If the CRR
and SLR requirements are increased, lending capacity of banks is
restricted.

6. Ability and Experience of Loan Officers: Loan officers of a bank

play a pivotal role in implementation of loan policies. A Bank
should consider skill and competence of its loan officers while
framing its loan policy. When a bank has knowledgeable and
experience staff it can operate in diverse forms of loan. Banks

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 should also take steps to train and educate staff in each and every
field of lending to cater varied needs of public.

7. Competitive Position: The competitive position of a bank may

also influence its loan policy. Banks refrain from entering the loan
fields where strong competing institutions exist. Some competing
banks are such experts in certain fields of lending that their
presence may affect the credit policy of other banks.

8. Credit Needs of the Area Served: The lending policy of a bank

shall take note of the area being served by it. A bank is supposed
to meet the loan demands of all the local borrowers, and if it fail to
do so then there will be little justification for its existence in that
area. Mostly, the credit needs in an area arise from the dominant
economic activity of the area. If a bank is located in an area where
economy is predominantly dependent on agriculture, bank must
tailor its credit policy to meet loan demands of the farmers. But
banks must meet the loan requests that are logically and
economically sound.

Thus, there are various factors which affect credit policy of a bank and
also many aspects of banks‟ credit policy are determined from the guidelines
of Reserve Bank of India (RBI).

6.3 FACTORS AFFECTING BANK CREDIT BY VARIOUS BANK GROUPS

IN INDIA

There are numerous factors that affect allocation of credit by various

bank groups in India. The variables selected under the study as factors
affecting deployment of bank credit by various bank groups in India are
capital, deposits, borrowings, non-performing assets (NPAs), profits, number
of employees and number of offices. Capital of a bank means financial
resources available for use; deposits are the money placed into a banking
institution for safekeeping; borrowing represents amount received in
exchange for an obligation to pay back usually at a greater value at a
particular time in the future; NPAs refer to the loans that are in jeopardy of

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default; profits are the money a bank makes after accounting for all the
expenses; number of employees represent human assets of a bank; and
number of offices indicate branches of a bank in various areas.

The analysis of factors affecting bank credit has been done on the
basis of various statistical techniques like descriptive statistics, viz.
minimum, maximum, range, average, standard deviation, coefficient of
variation, and exponential growth rate. Kurtosis, skewness and one sample
Kolmogorov-Smirnov test have been applied for checking the normality of
the data. Correlation has been applied to study the association between
different factors which affect the credit deployment pattern; and step-wise
multiple regression analysis has been used to look for different
combinations of variables that explain variation in advances of the bank
groups in India. The regression is also helpful in eliminating some of
independent variables which are not required for the purpose, as some of
them being correlated with other variables don‟t add any value to the
regression model. However, the following variables have been examined for
the purpose of this study:

Dependent Variable:

Y = advances (Rs. in crore)

Independent Variables:

X1 = Capital (Rs. in crore)

X2 = Deposits (Rs. in crore)

X3 = Borrowings (Rs. in crore)

X4 = Investments (Rs. in crore)

X5 = NPAs (Rs. in crore)

X6 = Profits (Rs. in crore)

X7 = Number of employees

X8 = Number of offices.

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 Tables 6.1 to 6.12 show descriptive statistics, correlation and step-
wise multiple regression of various selected variables which affect bank
credit.

6.4.1 STATE BANK OF INDIA (SBI) & ITS ASSOCIATES

The descriptive statistics of various selected variables as factors

affecting bank credit in the case of SBI & its Associates during the period
1997-98 to 2011-12 have been presented in Tables 6.1 to 6.3.

Table 6.1
DESCRIPTIVE STATISTICS OF SBI & ITS ASSOCIATES
Number
Number of
Factors→ Advances Capital Deposits Borrowings Investments NPAs Profits of
Employees
Indicators↓ (Y) (X1) ( X 2) (X3) (X4) (X5) (X6) Offices
(X7)
(X8)

Mean 435722.60 1090.67 623847.20 51883.20 240799.33 20219.93 6739.67 280725 15246

Std.
351220.64 136.29 395095.84 53249.15 108075.84 8916.71 4363.12 17623.48 2280.59
Deviation

C.V. (%) 80.61 12.50 63.33 102.63 44.88 44.10 64.74 6.28 14.96

EGR (%) 20.69 1.01 15.62 26.68 11.54 3.52 16.84 -1.00 2.87

Minimum 97567.00 1036.00 173603.00 8851.00 72703.00 12541.00 1466.00 249008.00 13334.00

Maximum 1151991.00 1566.00 1405024.00 158782.00 417322.00 48215.00 15334.00 308817.00 20260.00

Range 1054424.00 530.00 1231421.00 149931.00 344619.00 35674.00 13868.00 59809.00 6926.00

Skewness 0.903 3.451 0.817 1.053 0.194 2.522 0.661 0.089 1.239

Kurtosis -0.497 12.524 -0.591 -0.397 -0.891 7.246 -0.771 -0.278 0.208

One sample
Kolmogorov-
0.588 0.057 0.705 0.380 0.893 0.180 0.703 0.860 0.244
Smirnov
Sig.

Table 6.1 reveals that in the case of SBI & its Associates, on an
average, Y = Rs. 435722.60 crore, X1 = Rs.1090.67 crore, X2 = Rs.
623847.20 crore, X3 = Rs. 51883.20 crore, X4 = Rs. 240799.33 crore, X5 =
Rs. 20219.93 crore and X6 = 6739.67 crore during the period of study. The
number of employees (X7) and offices (X8) are 280725 and 15246
respectively. A huge variation exists in X3, Y, X6 and X2 exhibiting the
percentages of 102.63, 80.61, 64.74, and 63.33 respectively. In SBI & its
Associates, variables such as borrowings (26.68%), advances (20.69%),
profits (16.84%), deposits (15.62%), and investments (11.54%) grew
significantly, whereas number of employees recorded a negative growth of -

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1.00 per cent during the period of study. NPAs, number of offices and
capital recorded a nominal growth of 3.52 per cent, 2.87 per cent and 1.01
per cent respectively during the study period. All the variables are found to
be normally distributed except X1 and X5 which have kurtosis greater than 3
indicating more than a normal distribution and having high probability for
extreme values.
Table 6.2
CORRELATION COEFFICIENT MATRIX OF SBI & ITS ASSOCIATES

Y X1 X2 X3 X4 X5 X6 X7 X8

Y 1.000

0.364
X1 1.000
(0.183)
0.995** 0.343
X2 1.000
(0.000) (0.211)
0.993** 0.312 0.987**
X3 1.000
(0.000) (0.257) (0.000)
0.918**) 0.275 0.951** 0.900**
X4 1.000
(0.000) (0.320) (0.000) (0.000)
0.695** 0.082 0.686** 0.722** 0.585*
X5 1.000
(0.004) (0.770) (0.005) (0.002) (0.022)
0.977** 0.376 0.985** 0.963** 0.957** 0.632*
X6 1.000
(0.000) (0.167) (0.000) (0.000) (0.000) (0.011)
-0.506 -0.543* -0.526* -0.418 -0.591* 0.099 -0.570*
X7 1.000
(0.054) (0.037) (0.044) (0.121) (0.020) (0.725) (0.027)
0.986** 0.326 0.981** 0.994** 0.898** 0.780** 0.955** -0.381
X8 1.000
(0.000) (0.235) (0.000) (0.000) (0.000) (0.001) (0.000) (0.161)
** Correlation is significant at 0.01 level (2-tailed).
* Correlation is significant at 0.05 level (2-tailed).
Table 6.2 shows the correlation among all the selected variables of SBI
& its Associates. The standardized values shown in the correlation table fall
in the range from 0-1. The table depicts a highly positive and statistically
significant correlation between Y (advances) and X2 (deposits), X3
(borrowings), X4 (investments), X6 (profits), and X7 (number of bank offices)
at 1 per cent level of significance, whereas Y (advances) has been found
negatively but moderately, and statistically significantly correlated with X6
(number of employees) at 5 per cent level of significance. Y has been found
positively and moderately correlated with X1 (capital) and X4 (NPAs) with the
values of 0.357 and 0.501 respectively. Thus, in order to augment advances
in SBI & its Associates‟ and their deposits (X2), borrowings(X3), and number

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of employees (X7) need to be increased; and the level of NPAs (X 5) is required
to be curtailed considerably.
Table 6.3
MULTIPLE REGRESSION ANALYSIS OF SBI & ITS ASSOCIATES
Adjusted
Steps Intercept X2 X3 X7 X5 R2 F-ratio
R2
-116277.895 0.885**
I _ _ _ 0.991 0.990 1393.527**
(-6.708) (37.330)
-32626.116 0.527** 2.691**
II _ _ 0.995 0.994 1222.020**
(-1.135) (4.753) (3.271)
446326.352 0.250 4.520** -1.429*
III _ 0.997 0.996 1148.785**
(2.245) (1.696) (4.414) (-2.427)
729745.80 6.245** -2.201**
IV _ _ 0.996 0.995 1488.777**
(6.299) (47.027) (-5.487)
907299.059 5.761** -2.970** 3.124*
V _ 0.998 0.997 1642.975**
(8.391) (29.873) (-7.327) (2.971)
The figures in parentheses represent the t-values.
** Refers to 1 per cent significance level
* Refers to 5 per cent significance level
Table 6.3 highlights the results of step-wise multiple regression
analysis for the study period. It can be seen from the table that variable X2
(deposits) enters in the regression model at the first step, singularly

explaining 99.00 per cent variation in Y (advances) with regression

coefficient 0.885. At the second step, variable X3 (borrowings) enters the
analysis and together with X2 explains 99.40 per cent of variation in the
advances. One unit of increase in X3 leads to 2.691 units increase in Y. At
the third step, variable X7 (number of employees) enters with regression
coefficient -1.429 along with the variables X3 and X2. But X2 becomes less
significant. This is due to the principle of multi-collinearity which means
that there is some dependency between independent variables. In the fourth
step, X2 is removed, borrowings with regression coefficient of 6.245 and
number of employees with regression coefficient -2.201 collectively explain
99.50 per cent variation in advances. In the last step, X5 enters into the
analysis and finally borrowings with regression coefficient of 5.761, number
of employees with regression coefficient -2.970 and NPAs with the regression
coefficient 3.124 collectively explain 99.70 per cent variation in advances. F-
test for the model is found to be highly significant at 1 per cent level of
significance.

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 The multivariate analysis for the period concludes: Y = 907299.059+ 5.761
X3 – 2.970 X7 +3.124 X5 + e.

Where, e is the error term.

After the fifth step, no other variable was found to significantly affect
advances of the bank. The regression coefficients of three variables X3, X7
and X5 explain 99.70 per cent variation in Y. So, only these three variables
were found to significantly affect the advances of SBI & its associates during
the period 1997-98 to 2011-12.

6.4.2 NATIONALISED BANKS

The descriptive statistics of various variables as factors affecting bank

credit in Nationalised Banks during 1997-98 to 2011-12 have been
presented in Tables 6.4 to 6.6.

Table 6.4
DESCRIPTIVE STATISTICS OF NATIONALISED BANKS
Number
Number of
Factors→ Advances Capital Deposits Borrowings Investments NPAs Profits of
Employees
Indicators↓ (Y) (X1) ( X 2) (X3) (X4) (X5) (X6) Offices
(X7)
(X8)

Mean 919392.73 13643.47 1357960.33 85845.13 473377.13 35185.47 13365.93 494434 37777

SD 828218.69 1928.73 1041748.88 98082.48 288126.11 10679.29 11114.79 37171.88 5392.92

C.V. (%) 90.08 14.14 76.71 114.26 60.87 30.35 83.16 7.52 14.28

EGR (%) 23.40 0.34 18.15 37.10 14.26 1.92 24.80 -1.17 2.74

Minimum 162308.00 11294.00 358126.00 5069.00 154399.00 24786.00 1792.00 466063.00 33263.00

Maximum 2725316.00 17958.00 3596989.00 306151.00 1089948.00 69048.00 34180.00 570595.00 50729.00

Range 256308.00 6664.00 3238863.00 301082.00 935549.00 44262.00 32388.00 104532.00 17466.00

Skewness 1.101 0.997 1.096 1.215 1.007 2.479 0.809 1.436 1.367

Kurtosis 0.105 0.796 0.052 0.458 0.073 7.619 -0.559 0.507 1.000

One sample
Kolmogorov-
0.605 0.795 0.553 0.379 0.619 0.127 0.672 0.121 0.361
Smirnov
Sig.

Table 6.4 reveals that in the case of nationalised banks, the mean
value of Y = Rs. 919392.73 crore, X1 = Rs.13643.47 crore, X2 = Rs.
1357960.33 crore, X3 = Rs. 85845.13 crore, X4 = Rs. 473377.13 crore, X5 =
Rs. 35185.47 crore, and X6 = Rs. 13365.93 crore during the period of study.
The number of employees (X7) and offices (X8) are 494437 and 37777

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respectively. There is a the huge variation in X3, Y, X6, X2 and X4 of 114.26
per cent, 90.08 per cent, 83.16 per cent, 76.71 per cent and 60.87 per cent
respectively. In Nationalised banks, variables like borrowings (37.10%),
profits (24.80%), advances (23.40%), deposits (18.15%), and investments
(14.26%) grew significantly, whereas number of employees recorded a
negative growth of -1.17 per cent during the period under study. Number of
offices, NPAs and Capital recorded a nominal growth of 2.74 per cent, 1.92
per cent and 0.34 per cent respectively during the study period. All the
variables were found to be normally distributed except X5 which has
kurtosis greater than 3, indicating sharper distribution than a normal one
and having high probability for extreme values.
Table 6.5
CORRELATION COEFFICIENT MATRIX OF NATIONALISED BANKS

Y X1 X2 X3 X4 X5 X6 X7 X8

Y
1.000

0.419
X1 1.000
(0.120)
0.999** 0.424
X2 1.000
(0.000) (0.115)
0.991** 0.472 0.990**
X3 1.000
(0.000) (0.075) (0.000)
0.990** 0.427 0.993** 0.984**
X4 1.000
(0.000) (0.112) (0.000) (0.000)
0.604* 747** 0.609* 0.632* 0.628*
X5 1.000
(0.017) (0.001) (0.016) (0.011) (0.012)
0.985** 0.389 0.988** 0.969** 0.991** 0.550*
X6 1.000
(0.000) (0.152) (0.000) (0.000) (0.000) (0.034)
-0.451 0.166 -0.463 -0.405 -0.521* -0.037 -0.540*
X7 1.000
(0.091) (0.554) (0.082) (0.134) (0.046) (0.896) (0.038)
0.995** 0.464 0.994** 0.988** 0.982** 0.665** 0.969** -0.381
X8 1.000
(0.000) (0.081) (0.000) (0.000) (0.000) (0.007) (0.000) (0.161)
** Correlation is significant at 0.01 level (2-tailed).
* Correlation is significant at 0.05 level (2-tailed).

Table 6.5 depicts the correlation among all the selected variables of
nationalised banks. The study exhibits a highly positive and statistically
significant relation between Y (advances) and X2 (deposits), X3 (borrowings),
X4 (investments), X6 (profits), and X8 (number of bank offices) ranging from
0.985 to 0.999, whereas Y has been found to be having a negative but

229
statistically significant correlation with X7 (number of employees). The
analysis exhibits a moderately statistically significant association between Y
(advances) and X5 (NPAs) with the regression coefficient of 0.604. In order to
increase the deployment of credit by nationalised banks, their deposits (X2),
borrowings (X3), investments (X4), NPAs (X5), Profits (X6), and number of
branches (X8) needs to be increased. Further, in certain cases, independent
variables are highly correlated with each other which indicates that only one
or two of them can be used to predict the dependent variable (advances).

Table 6.6
MULTIPLE REGRESSION ANALYSIS OF NATIONALISED BANKS

Step Intercept X2 R2 Adjusted R2 F-ratio

-159475.283 0.794**
I 0.999 0.999 9379.724**
(-11.502) (96.804)
The figures in parentheses represent the t-values.
**Refers to 1 per cent significance level

The results of step-wise multiple regression analysis for the study

period are exhibited in Table 6.6. The table reveals that X2 (deposits) enters
in the regression model at the first step. It singularly explains 99.90 per cent
variation in Y (advances) with regression coefficient of 0.794. Thus, it means
that one unit of increase in X2 leads to 0.794 units increase in Y. After the
first step, no other variable was found to significantly affect Y in the case of
nationalised banks. Thus, the regression coefficient of X2 explains 99.90 per
cent variation in advances during 1997-98 to 2011-12. F-Test for the model
is also highly significant at 1 per cent level of significance. Based on the
model the equation can be written as:

Y= -159475.283 + 0.794 X2 + e.

Where, e is the error term.

6.4.3 PRIVATE SECTOR BANKS

The descriptive statistics of various variables as factors affecting bank

credit in private sector banks during the period 1997-98 to 2011-12 have
been presented in Tables 6.7 to 6.9.

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 Table 6.7
DESCRIPTIVE STATISTICS OF PRIVATE SECTOR BANKS
Number
Number of
Factors→ Advances Capital Deposits Borrowings Investments NPAs Profits of
Employees
Indicators↓ (Y) (X1) ( X 2) (X3) (X4) (X5) (X6) Offices
(X7)
(X8)

Mean 337706.40 3350.73 450526.40 76332.73 196000.13 10597.33 6729.87 116394.80 7542.53

SD 298850.48 1169.09 357601.85 75131.82 151647.94 5270.20 6749.48 61163.49 2752.74

C.V. (%) 88.49 34.89 79.37 98.43 77.37 49.73 100.29 52.55 36.50

EGR (%) 27.80 8.73 22.88 34.90 22.36 11.82 28.60 11.52 7.19

Minimum 35420.00 1689.00 69516.00 2085.00 26590.00 3186.00 709.00 59374.00 4941.00

Maximum 966403.00 4783.00 1174587.00 258420.00 525982.00 18768.00 22718.00 248284.00 13976.00

Range 930983.00 3094.00 1105071.00 256335.00 499392.00 15582.00 22009.00 188910.00 9035.00

Skewness 0.836 -0.212 0.752 1.247 0.873 0.301 1.272 0.802 1.270

Kurtosis -0.390 -1.573 -0.619 1.028 -0.091 -1.209 0.857 -0.482 0.733

One sample
Kolmogorov-
0.684 0.845 0.707 0.571 0.743 0.886 0.489 0.535 0.576
Smirnov
Sig.

Table 6.7 reveals that in private sector banks the mean value of Y =
Rs. 337706.40 crore, X1 = Rs.3350.73 crore, X2 = Rs. 450526.40 crore, X3 =
Rs. 76332.73 crore, X4 = Rs. 196000.13 crore, X5 = Rs. 10597.33, and X6 = Rs.
6729.87 crore during the period of study. The number of employees (X7) and
offices (X8) are 116394.80 and 7542.53 respectively. Value of one sample
Kolmogorov-Smirnov in all the variables is found to be greater than 0.05;
and all the variables have less than 3 value of kurtosis which indicates that
these were normally distributed. There is a huge variation in X6, Y, X3, X2
and X5 of 100.29 per cent, 98.43 per cent, 88.49 per cent, 79.37 per cent
and 77.37 per cent respectively. In private sector banks, exponential growth
rate has revealed a growth of 34.90 per cent in borrowings, 28.60 per cent in
profits, 27.80 per cent in advances, 22.88 per cent in deposits, 22.36 per
cent in investments, 11.82 per cent in NPAs, 11.52 per cent in number of
employees, 7.19 per cent in number of offices and 8.73 per cent in capital.

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 Table 6.8
CORRELATION COEFFICIENT MATRIX OF PRIVATE SECTOR BANKS
Y X1 X2 X3 X4 X5 X6 X7 X8
Y 1.000
0.912**
X1 1.000
(.000)
0.999** 0.921**
X2 1.000
(0.000) (0.000)
0.972** 0.837** 0.966**
X3 1.000
(0.000) (0.000) (0.000)
0.997** 0.910** 0.996** 0.981**
X4 1.000
(0.000) (0.000) (0.000) (0.000)
0.885** 0.840** 0.886** 0.923** 0.904**
X5 1.000
(0.000) (0.000) (0.000) (0.000) (0.000)
0.988** 0.849** 0.984* 0.985** 0.990** 0.880**
X6 1.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
0.989** 0.894** 0.988** 0.952** 0.981** 0.845** 0.970**
X7 1.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
0.985** .839** .981** .984** .986** .874** .997** .970**
X8 1.000
(0.000) (0.000) 0.000 (0.000) (0.000) (0.000) (0.000) (0.000)
** Correlation is significant at the 0.01 level (2-tailed).

Table 6.8 reveals the correlation among all the selected variables of
private sector banks. The analysis reveals that Y (advances) has a highly
significant correlation with all the selected variables, viz. X1 (capital), X2
(deposits), X3(borrowings), X4 (investments), X5 (NPAs,) X6 (profits), X7
(number of employees), and X8 (number of offices) with the values ranging
from 0.885 to 0.999. Thus, all the selected variables have been found to be
affecting Y which indicates a fairly good set of independent variables to
correlate with advances. It is further revealed that the independent
variables are highly correlated with each other which indicates that they are
not independent of each other.
Table 6.9
MULTIPLE REGRESSION ANALYSIS OF PRIVATE SECTOR BANKS
Adjusted
Steps Intercept X2 X6 R2 F-ratio
R2
-38528.494 0.835**
I _ 0.999 0.998 8944.465**
(-7.685) (94.575)
-27884.971 0.714** 6.507**
II 0.999 0.999 7923.886**
(-5.636) (19.303) (3.319)
The figures in parentheses represent the t-values.
** Refers to 1 per cent significance level

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 Table 6.9 reveals the results of step-wise multiple regression analysis
for the study period. It can be seen from the table that X2 (deposits) enters in
the regression model at the first step, singularly explaining 99.80 per cent
variation in Y (advances) with regression coefficient 0.835. In the second
step, X6 (profits) enters the analysis and together with X2 explains 99.90 per
cent of variation in the advances. One unit of increase in X6 leads to 6.507
units increase in Y. F-test for the model is found to be highly significant at 1
per cent level of significance.

The multivariate analysis for the period concludes:

Y = -27884.971 + 0.714 X2 + 6.507 X6 + e

Where, e is the error term.

6.4.4 FOREIGN BANKS

The descriptive statistics of various variables as factors affecting bank

credit in Foreign Banks during the period 1997-98 to 2011-12 have been
presented in Tables 6.10 to 6.12.

Table 6.10
DESCRIPTIVE STATISTICS OF FOREIGN BANKS
Number
Number of
Factors→ Advances Capital Deposits Borrowings Investments NPAs Profits of
Employees
Indicators↓ (Y) (X1) ( X 2) (X3) (X4) (X5) (X6) Offices
(X7)
(X8)

Mean 100871.87 13646.20 127912.40 45806.73 76602.60 3487.00 3621.47 20754.00 259.80

SD 67158.94 13482.27 81937.67 31863.69 59332.55 1789.01 2942.81 7584.72 39.10

C.V. (%) 66.58 98.80 64.06 69.56 77.46 51.31 81.26 36.55 15.05

EGR (%) 17.27 27.89 15.71 16.46 17.77 7.48 22.11 6.97 3.05

Minimum 29290.00 1780.00 42873.00 9855.00 18382.00 1928.00 630.00 11703.00 196.00

Maximum 229849.00 40631.00 276948.00 120422.00 200651.00 7134.00 9426.00 33969.00 323.00

Range 200559.00 38851.00 234075.00 110567.00 182269.00 5206.00 8796.00 22266.00 127.00

Skewness 0.598 0.936 0.628 1.115 1.039 1.224 0.778 0.375 0.241

Kurtosis -1.064 -0.627 -1.246 0.586 -0.330 -0.108 -0.809 -1.543 -0.903

One sample
Kolmogorov- 0.633 0.371 0.421 0.498 0.269 0.075 0.368 0.449 0.991
Smirnov Sig

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 Table 6.10 reveals that in the case of foreign banks, on an average, Y
= Rs. 100871.87 crore, X1 = Rs. 13646.20 crore, X2 = Rs. 127912.40 crore,
X3 = Rs. 45806.73 crore, X4 = Rs. 76602.60 crore, X5 = Rs. 3487.00 crore,
and X6 = 3621.47 crore during the period of study. The number of employees
(X7) and branches (X8) are 20754 and 259.80 respectively. X1 recorded the
highest variation of 98.80 per cent followed by profits (81.26) per cent,
investments (77.46 per cent), borrowing (69.56 per cent), advances (66.58
per cent), deposits (64.06 per cent), and NPAs (51.31 per cent), whereas the
lowest variation has been found with regard to number of offices, i.e., 15.05
per cent followed by number of employees, i.e., 36.55 per cent. All the
selected variables are found to be normally distributed. The study has
reflected a significant growth in variables like capital (27.89%), profits
(22.11%), investments (17.77%), advances (17.27%), borrowings (16.46%)
and deposits (15.71%), whereas exponential growth rate has shown a small
growth of 6.97 per cent and 3.05 per cent in the number of employees and
branches respectively during the study period.
Table 6.11
CORRELATION COEFFICIENT MATRIX OF FOREIGN BANKS
Y X1 X2 X3 X4 X5 X6 X7 X8
Y 1.000
0.978**
X1 1.000
(0.000)
0.993** 0.988**
X2 1.000
(0.000) (0.000)
0.973** 0.974** 0.967**
X3 1.000
(0.000) (0.000) (0.000)
0.963** 0.994** 0.980** 0.973**
X4 1.000
(0.000) (0.000) (0.000) (0.000)
0.761** 0.845** 0.823** 0.804** 0.884*
X5 1.000
(0.001) (0.000) (0.000) (0.000) (0.000)
0.981** 0.951** 0.965** 0.966** 0.931* .731**
X6 1.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.002)
0.868** 0.803** 0.862** 0.755** 0.757** .555* 0.853**
X7 1.000
(0.000) (0.000) (0.000) (0.001) (0.001) (0.032) (0.000)
0.928** 0.929** 0.937** 0.935** 0.930** .796** 0.887** 0.798**
X8 1.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).

234
 Table 6.11 explains the correlation among all the selected variables of
foreign banks. It is evident that Y (advances) has a significant correlation
with all the variables, i.e., X1 (capital), X2 (deposits), X3 (borrowings), X4
(investments) X5 (NPAs,) X6 (profits), X7 (number of employees) and X8
(number of offices) with regression coefficient of 0.978, 0.993, 0.973, 0.963,
0.761, 0.981, 0.868 and 0.928 respectively. It implies that all the selected
variables have a positive and statistically highly significant association
between the dependent and independent variables. This indicates toward a
choice of good set of independent variables to correlate with advances. Thus,
all the selected variables are found to be affecting the advances. The
advances can be increased, if all the variables show an improvement in their
performance. The correlation matrix further reveals that the independent
variables are found to be highly correlated with each other.

Table 6.12
MULTIPLE REGRESSION ANALYSIS OF FOREIGN BANKS
Adjusted
Steps Intercept X2 X6 R2 F-ratio
R2
-3211.686 0.814**
I _ 0.986 0.984 889.458**
(-0.783) (29.824)
2954.235 0.551** 7.590**
II 0.993 0.992 873.062**
(0.871) (7.373) (3.650)
The figures in parentheses represent the t-values.
** Refers to 1 per cent significance level.

The results of step-wise multiple regression analysis for the study

period have been presented in Table 6.12 which indicate that at the first
step X2 (deposits) enters in the regression model and singularly explains
98.40 per cent variation in advances with regression coefficient of 0.814. At
the second step, X6 (profits) enters into the analysis and together with X2
explains 99.20 per cent of variation in Y (advances). One unit of increase in
X6 leads to 7.590 units increase in Y. The equation can be written as:

Y = 2954.234 + 0.551 X2 +7.590 X6 + e

Where, e is the error term.

235
 After the second step, no other variable has been found to be
significantly affecting advances of the bank. The regression coefficients of
two variables, i.e., X2 and X6 explain 99.20 per cent variation in Y. Only
these two variables are found to be significantly affecting the advances of
foreign banks during the period 1997-98 to 2011-12. F-test for the model is
also highly significant at 1 per cent level of significance.

6.5 CONCLUSION

One of the main functions of a bank is to meet the credit needs of

different sectors of the economy by using the funds of its depositors. But
banks cannot lend the funds indiscriminately. Banks should follow general
principles of lending, i.e., safety, liquidity, risk and profitability. Descriptive
analysis has revealed a significant growth in the distribution of bank credit
by all bank groups, i.e., SBI & its Associates (20.69%), nationalised banks
(23.42%), private sector banks (27.80%) and foreign banks (17.27%).
Correlation matrix depicts a significant association of all the independent
variables with advances in the case of private sector banks and foreign
banks, whereas in public sector banks (SBI & its Associates and
nationalised banks) advances have a significant association with deposits,
borrowings, investment, NPAs, profits and number of offices. The analysis
further reveals that in the case of SBI & its Associates, out of selected
factors, advances are found to be significantly associated and affected with
the borrowings, number of employees and NPAs. However, in the case of
nationalised banks, credit deployment has been found to be significantly
associated and affected by deposits, whereas in private sector banks and
foreign banks, advances are found to be significantly associated and affected
by deposits and profits. Thus, analysis reveals that credit deployment of
banks is significantly affected by certain factors, and banks need to consider
such factors while deploying bank credit.

236