CHAPTER - 5

Role of banks and financial

institutions in the economic growth
and development of Karnataka

Summary

This chapter examines the role of banks and financial institutions in the economic growth
and development of Karnataka. It assesses the strengths, opportunities, and challenges
of the banking sector in Karnataka. Karnataka is one of India’s most developed and
industrialized states with a rapidly growing information technology and service sector. It
historically had a robust banking infrastructure to support its industries, with many private
banks and Public Sector Banks (PSBs) originating from the state. As India’s bank credit
to GDP ratio increased from 25% in 1991-92 to 58% in 2020-21, Karnataka’s contribution
to this growth was relatively modest. Its Bank credit to GSDP ratio in FY 2019-20 stood
at 40.5 %, which is lower than that of many of its neighboring states. Sectors such as
manufacturing, transport and trading receive inadequate credit relative to their economic
potential. Karnataka’s relatively low bank loan penetration indicates that many borrowers
such as small businesses, self-employed and farmers are credit-constrained and depend
on informal financial institutions like co-operative credit societies or local money lenders.
Excessive dependence on informal sources of finance impedes development. Therefore,
it is crucial to expand the coverage of formal banking finance within the state. Based on
the criteria of villages having any bank branch/BCs or IPPB Centre, there is no unbanked
village in Karnataka as on 31.10.2021 based on the data updated by banks on the Jan
Dhan Darshak App as informed by Dept. of Financial Services, Ministry of Finance, GoI.
A back-of-the-envelope estimation suggests, if Karnataka raises its bank credit to GSDP
ratio to 50% from the current 40.5%, it can potentially add 1.42% more to its GSDP every
year.

Key Highlights

RR Small and medium businesses in the trade, transport and industrial sector are credit
constrained.
RR There is a need to strengthen primary agricultural credit societies and cooperative
banks.
RR Expanding BC outlets is recommended to increase access to credit.
RR Enhancing cyber security capabilities is likely to sustain Karnataka’s leadership
position in digital payments and fintech
RR The target should be to reach Bank Credit to GSDP ratio of 50% by 2025-26
5.1 Karnataka’s Economic Landscape

Karnataka is the 5th largest state in India by GDP and ranks 3rd in per capita GDP among
large states. Karnataka experienced very high economic growth in recent years, with an
annualized 8% plus growth in GSDP over the last seven years, which is higher than the
national average growth rate during this period. Karnataka has emerged as a leading
state with knowledge-based industries such as IT, biotechnology and engineering. The
state also leads in IT and ITES exports with $42.16 billion in FY 2019-20. It also has an
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educated and skilled labor force to boost knowledge-based industries. It is also one of
the preferred investment destinations and accounted for 9% of the total FDI inflows to
India. In 2019-20, the tertiary sector contributed 66.19% to the state’s GSVA (Gross State
Value Added) at current prices, followed by secondary (22.29%) and primary (11.52%)
sectors. It is interesting to note that the service sector has grown at the expense of the
manufacturing sector and not the agricultural sector. While the share of the service
sector increased from 64% in 2015-16 to 66.19% in 2019-20, the share of the manufacturing
sector decreased from 23.39% to 22.29%.

5.1.1 Economic Performance – Comparative Study

This chapter evaluates Karnataka’s economic performance and outcomes against

comparable states to derive key trends and insights. Karnataka is a relatively developed
and industrialized state and comparable states should also be similar. The states which
have similar levels of per capita income, poverty rate, literacy rate, GDP and population
levels can be compared to extract meaningful insights. All the neighboring states of
Karnataka except Goa fulfill these criteria. The comparable states chosen for the analysis
are Andhra Pradesh, Kerala, Maharashtra, Tamil Nadu, and Telangana. All these states are
large states, with a population of more than 3 Crores and GSDP higher than $130 Billion.
All comparable states have a per capita income higher than the national average and a
poverty rate below 15%.
235000
GSDP per capita
215000

195000

175000

155000

135000

115000

95000

75000
14 15 16 17 18 19 20

Andhra Pradesh Karnataka Kerala

Maharashtra Tamil Nadu Telangana

Figure 5.1: State-wise GSDP from 2013-14 to 2019-20, Source: MoSPI GSDP data

Karnataka’s economy has grown very rapidly in the last six years. The per capita GSDP of
Karnataka has doubled from INR 1,18,829 in 2013-14 to INR 2,23,175 in 2019-20. In FY 2019-20,
all the six states except Andhra Pradesh have a per capita GSDP of more than INR 2 lakh.
The evolution of the per capita GSDP of Karnataka and its neighbors is plotted in Figure
5.1. Karnataka’s growth fell in FY 2017-18 and FY 2018-19, which was also compounded by
the slide in its ease of doing business rankings in 2019 when it ranked 13.

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Table 5.1: State-wise Comparison of Economic Variables

Per capita 5-year GSDP growth (2015-20) Ease of Doing

State
GSDP Real Nominal Business rank
Andhra Pradesh 168480 8.7% 13.1% 1
Karnataka 223175 8.5% 12.3% 17
Kerala 221904 5.9% 10.8% 28
Maharashtra 202130 6.6% 9.6% 14
Tamil Nadu 213396 7.0% 10.9% 13
Telangana 233325 8.9% 13.6% 3
Source: MoSPI; DIPP

5.2 Financial Development and Growth

Financial development and banking play a vital role in the economic growth of a region
(Levine (2005)). Empirical studies by King & Levine (1993) demonstrate that the level of a
country’s financial development helps predict its economic growth rate for the following
10-30 years. Guiso et al. (2005) confirm the higher impact of financial development on the
growth of financially dependent sectors. Svaleryd & Vlachos (2005) find that countries
with well-functioning financial systems tend to specialize in industries highly dependent
on external financing. Recent studies show that banking competition is associated with
a decline in both income and gender inequality, as the increase in economic activity
associated with the deregulation creates employment opportunities (Popov & Zaharia
(2016), Beck, Levine, & Levkov (2010)). Ilyina & Samaniego (2011) find that industries
that grow faster in more financially developed countries display greater R&D intensity,
indicating that efficient financial systems direct resources toward sectors where growth
is driven by R&D. Ang & Madsen (2012) show that risk capital and private credit play an
important role in stimulating knowledge production, and countries with more developed
financial system tend to be more innovative. Research studies also show that financial
development is good only up to a point. It becomes a drag on growth and is detrimental
to aggregate productivity growth (Cecchetti & Kharroubi, (2012)) after that. High credit
growth achieved through relaxations in prudential regulations can create a moral hazard
that can lead to inefficient capital allocation and zombie lending. (Mannil, Nishesh, &
Tantri, 2021). In sum, the literature seems to suggest that a well-regulated, market-based,
and competitive financial system is essential for economic growth.

5.3 Karnataka’s Financial Sector

Karnataka’s performance in the banking sector could be understood by analyzing it along

with the five neighboring states on comparable variables such as Bank credit to GDP ratio,
credit growth, per capita credit and bank loan penetration. Bank Credit to GSDP ratio
reflects the formal financialization of the economy. It is a metric used by international
financial organizations like World Bank and IMF to measure financial development in a
country. In FY 2019-20, Karnataka had a bank credit to GDP ratio of 40.5%, which is less
than the All-India average of 56.7%. Karnataka has lower bank credit to GDP ratio than
Telangana and Tamil Nadu. The bank credit to GSDP ratio in Maharashtra is 2.5 times that
of Karnataka.

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Table 5.2: State-wise Comparison of Banking Variables, Source: MoSPI; RBI Quarterly
State-wise Credit data; Population Census 2001
Per capita bank Bank Credit to Bank loan Credit Growth
State
credit GSDP penetration (5yr avg)
Andhra Pradesh 65093 38.6% 20.8% 15.5%
Karnataka 90301 40.5% 22.0% 10.1%
Kerala 87359 39.4% 30.7% 10.8%
Maharashtra 204767 101.3% 36.6% 7.8%
Tamil Nadu 113307 53.1% 42.5% 8.3%
Telangana 120244 51.5% 21.8% 8.9%
Source: MoSPI; RBI Quarterly State-wise Credit data; Population Census 2001

Bank credit per capita of Karnataka is also lower than Tamil Nadu by 21.4 % and Telangana
by 25%, despite its GSDP per capita being higher than Tamil Nadu and very close to that
of Telangana. Bank loan penetration is the number of bank loan accounts as a proportion
of the population. Bank loan penetration for Karnataka more than doubled from 10.9% in
2014-15 to 22% in 2019-20. This is slower than the rate of growth observed for Maharashtra
and at a smaller level than Tamil Nadu. The low banking penetration of Karnataka
suggests that many households in Karnataka lack access to bank credit and depend on
informal financial institutions or money lenders for their credit needs. In terms of credit
growth in recent years, Karnataka stands better than the rest with a CAGR of 10.1%, and
only behind Andhra Pradesh. Overall, various performance metrics on Karnataka’s
banking indicate that Karnataka has relatively ample scope for further increase in access
to credit.

Figure 5.2: State-wise Number of outstanding loans divided by population from 2013-14 to
2019-20, Source: RBI Quarterly BSR-1 Outstanding Credit of Scheduled Commercial Banks;
Population Census 2011

50.0%
Bank Loan Penetration
40.0%

30.0%

20.0%

10.0%

0.0%

15 16 17 18 19 20

Andhra Pradesh Karnataka Kerala

Maharashtra Tamil Nadu Telangana

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5.3.1 Credit Distribution by Sector

Sectoral distribution of credit helps us identify the sectors that are most affected by
lack of credit. A comparison of the ratio between Bank credit to a particular sector and
sectoral component of GSDP is shown in Table 5.3. Like every other state, Karnataka has
high credit to GSDP ratio in the agriculture (56.7%) and industrial sector (57.7%). Yet, it
holds 3rd position both in agricultural credit and industrial credit. Karnataka holds the
2nd position in services credit, while it lags in transport (11.2%) and trade sector (29.2%)
with 5th and 4th positions respectively. This suggests that Karnataka has to improve its
credit outflow to the transport and trade sectors. Even in industrial credit, Karnataka’s
credit to GSDP ratio is almost half of Telangana, and bridging this gap is essential for the
revival of the manufacturing sector in Karnataka.

Table 5.3: State-wise Comparison of Bank Credit to GSDP by Sector

State Agriculture Industry Transport Services Trade Finance
Andhra Pradesh 40.1% 33.5% 10.7% 7.0% 50.2% 24.0%
Karnataka 56.7% 57.7% 11.2% 11.9% 29.2% 45.5%
Kerala 100.0% 21.3% 13.2% 7.5% 22.0% 122.6%
Maharashtra 47.1% 124.1% 50.9% 21.6% 74.2% 204.7%
Tamil Nadu 82.7% 45.2% 19.2% 10.9% 42.5% 97.6%
Telangana 45.4% 107.2% 21.6% 10.5% 24.9% 32.7%
Source: MoSPI; RBI Quarterly State-wise Credit data by Sector 2019-20

5.3.2 Credit Distribution by Bank Group

The distribution between private banks and Public Sector Banks (PSBs) credit in Karnataka
is similar to other states. Small Finance Banks (SFBs) contribute to a meager 0.3% share
of credit in Karnataka. There is scope to increase the share of lending by SFBs. SFBs are
niche banks that can cater to the priority sector, as they are specialized in lending to
small businesses, small and marginal farmers, and the unorganized sector.

Table 5.4: State-wise Distribution of Credit by Bank Type

State Private Public RRB Small finance
Andhra Pradesh 18.7% 73.5% 7.8% 0.1%
Karnataka 39.9% 55.1% 4.7% 0.3%
Kerala 39.9% 53.3% 5.3% 1.4%
Maharashtra 40.7% 58.7% 0.4% 0.3%
Tamil Nadu 40.6% 57.1% 1.3% 1.0%
Telangana 32.4% 63.9% 3.7% 0.0%
Source: RBI Quarterly State-wise Credit data 2019-20

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5.3.3 Credit Distribution of Financial Institutions other than SCBs

Table 5.5: State-wise Ratio of credit of a financial institution type to SCB credit.
State Co-operative Banks NBFC MFI HFC
Andhra Pradesh 8.9% 0.2% 6.2%
Karnataka 9.8% 2.8% 12.2%
Kerala 16.5% 2.8% 5.6%
Maharashtra 9.5% 0.6% 7.0%
Tamil Nadu 4.3% 3.6% 8.0%
Telangana 3.6% 0.1% 11.9%
Source: RBI Quarterly State-wise Credit data 2019-20; MFIN report 2020; RBI State-wise annual account of
State & District Co-operative Banks and Urban co-operative bank 2019-20

Financial institutions other than Scheduled Commercial Banks (SCB) provide credit to
households and businesses such as NBFCs, MFIs, HFCs, and co-operative banks. Their
contribution to lending activity is measured by estimating its outstanding credit as
a proportion of the total outstanding credit to Scheduled Commerical Banks (SCB),
making it easier to compare across states. As evident from Table 5.5 the proportion of
Co-operative Bank credit to total SCB credit at 9.8% for Karnataka is the second highest,
only behind Kerala. The contribution of NBFC MFIs is small but is comparable to other
states. NBFC MFIs provide microfinance loans to marginal borrowers. Although its
contribution might be lower in terms of overall credit, it gives access to credit for millions
of households. Karnataka retains the top position in terms of contribution by Housing
Finance Companies (HFCs). This is an encouraging development, which bodes well for
the housing and real estate sector in Karnataka.

5.3.4 Dependence on Co-operative Banks

In India, cooperative banks play an important role in rural financing, with a specific focus
on agriculture, small-scale and cottage industries and self-employment. Co-operative
banks have often been riddled with lax governance standards and weak credit culture.
Legislative changes were introduced to grant RBI powers to regulate cooperative banks in
this context. Co-operative Banks contribute to 9.8% of the total bank credit in Karnataka,
more than twice that of Tamil Nadu and Telangana. The broad category of cooperative
banks includes state and district cooperative banks, primary agricultural societies and
Urban Cooperative Banks. The share of cooperative bank credit is highly skewed in
certain districts and sectors. Within Karnataka, the districts with the highest share of
credit from cooperative banks have performed relatively poorer than the rest in terms
of per capita income and poverty rate growth. Districts such as Bagalkote, Bidar and
Vijayapura have a higher share of co-operative bank credit also are some of the poorest
districts in Karnataka, as measured in terms of poverty rate (Annexure 5.1).

It is possible to reduce the dependence of borrowers on cooperative banks by encouraging

commercial banks, including public sector banks, to open branches in areas dominated
by cooperative banks. This will ensure that borrowers have more choices while applying
for a loan. The competition from commercial banks will pressure cooperative banks to
improve governance and risk management.

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Box 1 – Impact of co-operative bank lending on district outcomes

Ratio of co-operative bank credit to commercial bank credit is estimated for each
district from the balance sheet of district co-operative banks and RBI district wise
SCB credit data for the financial year 2019-20. Parameters used for evaluating
economic growth of a district are per capita NDDP , growth in per capita NDDP
in last 10 years and multi-dimensional poverty rate. The correlation coefficient
between share of cooperative bank credit and economic parameters for 30
districts is estimated. Correlation coefficient of Co-op Bank credit & Per capita
income is -0.154 , suggesting that districts with higher share of co-operative bank
had lower per capita income.

5.3.5 Distribution of Unbanked Rural Villages

Research studies show the expansion of bank branches in rural areas reduces poverty
(Burgess & Pande, 2005), (Cramer, 2021). It improves the access of rural poor to formal
credit and savings opportunities. As part of its financial inclusion strategy, RBI introduced
a policy in 2011 requiring all Scheduled Commercial Banks (SCBs) to open 25% of their
new branches to be opened in unbanked rural centers (URC). Unbanked rural centers are
villages or census towns that do not have any brick-and-mortar branches of a bank. This
RBI policy led to the steady expansion of bank branches in unbanked rural areas. Despite
the massive growth, around 90% of the rural villages still lack a brick-and-mortar branch.
In 2017, RBI modified the policy and provided banks with the option of opening low-cost
banking correspondent outlets (BC outlets) in place of branches. BC outlets should be
capable of carrying out simple transactions like cash deposits, cash withdrawals, cheque
encashment and account opening.

By FY 2020-21, only 10.2% of Karnataka’s rural villages had bank branches, which is lower
than all southern states of India. Only Maharashtra is behind Karnataka on the share of
rural villages with bank branches. Around 95% of villages/towns have bank branches in
Karnataka in semi-urban areas. The data on BC outlets are not available and communities
supported by BC outlets are also considered a banked center by RBI. Therefore, the
proportion of the banked villages should be slightly higher than the one estimated in
Table 5.6.

District-wise distribution of rural villages and bank branch presence is provided in

Annexure 5.2. It reveals a considerable dispersion in the share of villages with bank
branches among districts in Karnataka, with Udupi at the top with 52.94% and Kolar at
the bottom with 4.86%. Fourteen districts have bank branches in less than 10% of their
villages. Only three districts have bank branches in more than 20% of their villages –
Udupi, Dakshina Kannada and Kodagu. Interestingly, none of the bottom five districts
are the erstwhile underbanked districts. The RBI policy of encouraging branches in
underbanked districts (Section 4.1) ensured that these districts caught up with the rest
of the districts of Karnataka. Among the erstwhile underbanked districts, 3 out of 6
districts have bank branches in more than 10% of its villages - Bangalore Rural, Bidar and
Chamarajanagar.

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Table 5.6: State-wise comparison on % share of villages with bank branches

Semi-Urban Rural
% of % of
States Village Village
Villages Villages
Villages with Bank Villages with Bank
With Bank With Bank
Branches Branches
Branches Branches
Andhra Pradesh 457 449 98.2% 16847 1872 11.1%
Karnataka 372 352 94.6% 28734 2927 10.2%
Kerala 1169 1097 93.8% 292 230 78.8%
Maharashtra 651 589 90.5% 43497 2707 6.2%
Tamil Nadu 945 782 82.8% 18055 2351 13.0%
Telangana 233 230 98.7% 8529 1241 14.6%
Source: RBI MOF Branch locator; population census 2011
Note: Note: No. of village branches in Karnataka as on 30.09.2021 is 4218 & Percentage works out to 15.39%.
as per SLBC.

5.3.6 Credit Constrained Firms

Businesses in Karnataka receive a lesser share of bank credit relative to their economic
size. Research studies have shown that many firms in the manufacturing, trading,
and service sector are credit constrained and receive either no credit or lesser credit
than required from formal financial institutions like banks (Banerjee and Duflo, 2014).
Karnataka’s relatively low credit to GSDP ratio across all sectors indicates that many
firms in Karnataka are credit constrained. Thus, many small and medium businesses in
Karnataka depend on central government schemes that offer credit guarantees. The
purpose of credit guarantee schemes is to encourage banks to provide collateral-free
loans to constrained borrowers, as part of the bank’s losses on loans in case of default is
absorbed by the government.

Figure 5.3: State-wise distribution as a share of All-India total for GDP (FY 2019-20), CGTMSE
outstanding credit, 2020-21 and PMMY outstanding credit

Source: MoSPI GSDP data; MUDRA website; CGTMSE website

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Credit Guarantee Trust for Medium and Small Enterprises (CGTMSE) is one of the
significant schemes intended for this purpose. Karnataka’s share of loans sanctioned
under CGTMSE during FY 2020-21 is 9.2%, which is higher than its share of GDP, as shown
in figure 5.3. This indicates that banks are ready to provide credit to constrained firms if
the government shares part of the credit risk. Similarly, the government of India launched
PM Mudra Yojana to enable small borrowers to access micro-loans up to 10 lakh for non-
farm income-generating activity. Credit Guarantee Fund guarantees the microloans
under the MUDRA scheme for Mirco Units (CGFMU), which will cover 75% of the losses
on loans due to default. All eligible borrowers will receive credit on the application for a
loan. Out of 1.7 lakh, Cr disbursed under Mudra Yojana, Karnataka’s share was 9.6%, which
is much higher than its share of GDP. Thus, Karnataka realized more than its potential
share of credit from both the MUDRA scheme and CGTMSE.

5.3.7 Digital Payments

India is witnessing a revolution in digital payments with the rise in UPI payments. India
became a pioneer in payment systems with the launch of UPI in 2016. It represented
a significant advance in payments innovation, enabling real-time digital payments on
a mobile platform. UPI allowed real-time payment transfers from one bank account to
another on a mobile platform using one’s UPI ID or phone number. UPI has roughly 150
million active users and 10 million transactions in a day, as of November 2021. Phonepe
is the leading UPI payment aggregator and has a market share of 46.7 %. Phonepe has
released state-wise UPI transaction data of its users. As Phonepe covers around 60% of all
unique UPI users, analysis of its state-wise transaction data would help in understanding
the latest trends

Table 5.7: State-wise UPI transactions and user (Q3 2021),

Transaction volume (In Transaction volume
State User penetration
Cr) Q3 FY21 share
Andhra Pradesh 43.20 8.21% 37.2%
Karnataka 75.33 14.31% 39.4%
Kerala 6.30 1.20% 20.8%
Maharashtra 79.29 15.06% 33.0%
Tamil Nadu 20.44 3.88% 23.1%
Telangana 62.29 11.83% 49.0%
Source: Phonepe Pulse

Table 5.7 provides the transaction volume (number), transaction volume as a share of
total transactions in India, and user penetration. Karnataka has a transaction value share
of 14.31%, which is about 1.8 times its GSDP share. It ranks second in transaction value
across all states in India. Karnataka also has a user penetration of 39.4%, making it the
state with the 2nd highest user penetration in India after Telangana. All the trends in
digital payments suggest that Karnataka has emerged as a leader in digital payments.

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Table 5.8: State-wise ATM-Debit card, credit card and internet fraud (FY 2019-20)
State Number of Frauds Fraud Amount (in Cr)
2017-18 2019-20 % increase 2017-18 2019-20 % increase
Andhra Pradesh 72 465 154% 0.26 1.84 166%
Karnataka 1573 2845 34% 10.58 17.57 29%
Kerala 120 745 149% 0.64 3.74 142%
Maharashtra 15629 21897 18% 43.44 44.99 2%
Tamil Nadu 3855 5258 17% 50.35 17.03 -42%
Telangana 571 1252 48% 2.29 1.51 -19%
Source: Lok Sabha Question on digital banking fraud

There are many challenges associated with digital payments. One of the biggest
challenges is the surge in fraud related to digital payments. First-time users are particularly
vulnerable to fraud by scamsters. In a survey conducted by YouGov and ACI, 71% of the
users have expressed concerns about the scams and frauds owing to the shift to digital
payment. The government, NPCI, RBI and payment companies have made many efforts
in creating awareness about phishing and security while establishing a robust grievance
redressal mechanism. Yet, we see a rise in the amount of fraud associated with digital
payments every year. Banks have reported frauds worth Rs 288 Cr in ATM-debit card,
credit card and internet transactions in FY 2019-20.

Figure 5.4: State-wise distribution as a share of All-India total for UPI transactions (Q3 2021)
and ATM-Debit card, credit card and internet fraud (FY 2019-20)

Source: Phonepe Pulse; Lok Sabha Question on digital banking fraud

As shown in Table 5.8, the number of fraud transactions in Karnataka has increased from
1573 in FY 2017-18 to 2845 in FY 2019-20 and fraud amount increased from Rs 10.58 Cr in
FY 2017-18 to Rs 17.57 Cr in FY 2019-20. The number of frauds in Karnataka as a share of
total frauds in India is 5.5%, which is below the digital transaction volume share (14.31%)
of Karnataka, as shown in figure 5.4. It indicates Karnataka has a lower fraud rate relative
to its very high percentage of digital transactions. This should encourage the state

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government to take the necessary steps to address this challenge. It should equip cyber
cells with the latest tools and capabilities to combat and tackle digital frauds.
5.4 Strengthen Formal Financial Institutions
It has been established in Section 3 that Karnataka lags behind comparable states across
many parameters related to the development of formal financial institutions. Karnataka
can address the shortfall in credit requirements by increasing the bank credit to GSDP
ratio to a level witnessed in Tamil Nadu and Telangana. It also needs to provide banking
services to households by opening branches in unbanked villages. The following sub-
section evaluates how opening bank branches in certain districts improved the economic
performance of those districts
5.4.1 Policy of Branch Expansion in Underbanked Districts
It is observed that districts with higher bank branch penetration experience higher
economic growth. This could be a case of correlation without causation. It is very likely
that banks open branches in districts that generate higher business, making banks’
decision to open a branch endogenous. The endogeneity issue can be overcome by
exploiting an exogenous event that leads banks to open branches in certain districts over
others. The RBI policy incentivizes banks to open branches in underbanked districts is
one such exogenous event.
RBI has historically pursued financial inclusion policy by either incentivizing or mandating
the banks to open branches in rural areas. In 2005, RBI introduced a new branch

Box 2 – Impact of commercial bank branch expansion on district outcomes

This section will provide the analysis of how underbanked districts performed better
than rest of the districts in Karnataka. Two district level parameters used for evaluating
economic performace wise growth in per capita NDDP and growth in number of
establishments (firms). The period for our analysis is from 2004-05 to 2012-13, during
which the policy of incetivizing bank branches in underbanked districts of Karnataka
was applicable. Although, the policy was discontinued in 2010-11, its effects persisted
for two more years. As expected, number of branches opened in underbanked disticts
increased by 6.2%, while it grew by 3.9% for rest of the districts. This translated to higher
credit growth in underbanked district (17.9%) compared to rest of the districts (13.9%).
Higher credit growth seems to have resulted in higher growth in per capia income in
underbanked districts (17.2%), which is 2.3 percentage points higher than rest of the
districts (14.9%) during this period. It also witnessed an upsurge in entrepreneurial
activity, as reflected from the growth in both manufacturing and service based
establishments in underbanked districts (25.4%), which was higher than rest of the
districts (5.8%). The district-wise parameters used in this analysis are presented in
Annexure 5.3

authorization policy for Scheduled Commercial Banks (SCBs) to incentivize banks to

open branches in underbanked or rural areas. RBI granted branch licenses in metro
and urban areas if a bank opens branches in underbanked districts or rural areas. This
policy provided a major impetus for improving banking access in underbanked districts.
RBI declared all those districts as underbanked whose number of branches per capita
was less than the national median. Karnataka had six underbanked districts in 2005 –
Bangalore Rural, Bidar, Chamarajanagar, Koppal, Kalaburagi and Raichur. SCBs, PSBs,

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and private banks began opening branches in these districts to gain licenses in metro
and urban areas. This push towards underbanked districts continued till the policy was
in place. This policy was modified in 2010, where RBI required a bank to open at least
1/3rd of the semi-urban or rural branches opened in a year to be in underbanked districts
in underbanked states (UDUS). To increase the access to credit, a policy to incentivize
opening branches and BC outlets in Karnataka is crucial.

Branch expansion in underbanked districts led to the expansion of credit and opening
of savings accounts. A savings account promotes savings habits and investment in
household assets. Access to credit allows individuals to start new ventures, which is
evident from the rising number of new firm creation in underbanked districts. Small and
medium businesses can invest in new technology and equipment to raise productivity
and output, thereby generating additional income. The evidence shown in Box 2
indicates that higher credit growth in underbanked districts led to a higher increase
in per capita NDDP and a higher number of new firms. Therefore, it is established that
opening more branches of SCBs through an exogenous policy action resulted in better
economic performance.

A simple economic simulation with basic assumptions shows that increasing the bank
credit to GSDP ratio to 50% generates additional GSDP growth of 1.42%. Let us assume
that the rate of growth projected for next 5 years in Karnataka is 8.5% and credit to GDP
ratio is raised by 2 percentage points each year to reach 50% by 2025-26. The GSDP of
Karnataka is equivalent to 1000 units and the entire portion of the additional credit is
used for gross fixed capital formation (GCFC). Let us assume a depreciation rate of 10%
and additional GCFC generates an annual return of 20%. This translates into additional
income every year, as shown in the table 5.9 . The additional growth projected for FY
2025-26 is 1.42%.

Table 5.9 : Projected Growth Rate till 2025-26

Projected Credit to Additional Additional Additional Additional
FY GSDP
growth GSDP Credit GFCF Income growth rate
2020-21 1000 8.5% 40
2021-22 1085 8.5% 42 21.7 21.7 4.3 0.40%
2022-23 1177 8.5% 44 23.5 43.1 8.6 0.73%
2023-24 1277 8.5% 46 25.5 64.3 12.9 1.01%
2024-25 1386 8.5% 48 27.7 85.6 17.1 1.24%
2025-26 1504 8.5% 50 30.1 107.1 21.4 1.42%

5.5. Role of NABARD, Cooperative Banks, KSFC and KSIIDC in Karnataka

5.5.1 Banking Scenario in Karnataka

Karnataka State has a fairly well developed financial infrastructure. The State has
pioneered in establishment of many leading commercial banks and is home to a wide
network of commercial bank branches in the country. Currently, Twelve Public Sector
Banks, Twenty-one Private Commercial Banks, Two Regional Rural Banks, Three Co-

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operative Banks, Five Small Finance Banks and Two Payment’s Banks are operating in
the State.

Disbursement of credit in rural areas takes place through co-operative banks, commercial
banks and regional rural banks.

National Bank for Agriculture and Rural Development (NABARD), as an apex level financial
institution, plays a lead role in the promotion of agriculture and rural development, by
preparing Potential Linked Credit Plans (PLPs) and annual action plans at the grass
root level. A major portion of NABARD’s refinance and developmental initiatives are
channellised through the banking sector.

An overview of the position of the banking network and ATM network in Karnataka
during the previous years is shown below:

5.5.1.1 Branch Network

Increase in
Branch Network March 2019 March 2020 March 2021
2020-21
Rural 4053 4214 4218 4
Semi urban 2554 2560 2629 69
Urban 2268 2364 2375 11
Metro/PT 2265 2331 2433 102
Total 11140 11469 11655 186
Source: State Level Bankers Committee (Agenda Notes of 154th Meeting: page no. 19), Karnataka.

Out of the total number of 11655 branches of all the agencies as on 31 March 2021 , as
many as 4218 branches (36.19%), 2629 branches (22.56%), 2375 branches (20.38%) and
2433 branches (20.88%) are operating in Rural, Semi-Urban, Urban and Metro areas
respectively.

In the last year there has been special impetus to increase branch networking in Semi
urban and Metro areas compared to Rural and urban areas. Increased network is providing
better access of financial services to people in urban and rural areas.

5.5.1.2 ATM Network across Karnataka

Increase in
ATM Network March 2019 March 2020 March 2021
2020-21
Rural 2231 2358 2441 83
Semi urban 3569 3489 3677 188
Urban 4177 4295 4322 27
Metro/PT 6755 7246 7250 4
Total 16732 17388 17690 302
Source: State Level Bankers Committee (Agenda Notes of 154th Meeting: page no. 22), Karnataka.

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There are 17690 ATMs comprising of Rural-2441, Urban-4322, Semi urban-3677 & Metro/
PT-7250 an increase of 302 over previous year.

5.5.1.3 Category wise Bank Branch network-Year ending

Branch March 2019 March 2020 March 2021

Commercial Banks 8155 8373 8414
Regional Rural Banks 1816 1775 1763
KASCARD 202 203 203
DCC Bank(K.S.co-op Apex Bk) 792 858 866
Karnataka Industrial Co-operative Bank 38 38 38
KSFC 32 32 32
Small Finance Banks 105 159 308
Payment Banks 0 31 31
Total 11140 11469 11655
Source: State Level Bankers Committee (Agenda Notes of 154th Meeting: page no. 154), Karnataka.

The ever growing demand for institutional finance in the state has resulted in expansion
of banking network and credit flow. There were 755 bank branches during the time of
nationalisation of banks in the year 1969. Since then 10900 Bank branches have been
added by March 2021 thus taking the total Bank branches to 11655 as shown in the above
table.

5.5.1.4 Aggregrate Bank Deposits and Gross Credit in all States and UTs

September 2021 (Rs.in crore)

States & UTs Number of

Aggregrate
Reporting Rank Gross Credit Rank
Deposit
offices
MAHARASHTRA 13255 3153466 1 2882819 1
NCT OF DELHI 3555 1439759 2 1294120 2
UTTAR PRADESH 17696 1320765 3 537836 7
KARNATAKA 10508 1266323 4 763797 4
TAMIL NADU 11708 1049804 5 1042159 3
WEST BENGAL 9390 937584 6 412414 9
GUJARAT 8408 878630 7 599340 5
KERALA 6640 639845 8 382827 10
TELANGANA 5490 623697 9 578984 6
HARYANA 5034 592764 10 298086 13
RAJASTHAN 7791 496510 11 375030 11

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September 2021 (Rs.in crore)

States & UTs Number of

Aggregrate
Reporting Rank Gross Credit Rank
Deposit
offices
PUNJAB 6427 482836 12 254318 14
MADHYA PRADESH 7196 480350 13 315545 12
BIHAR 7510 405915 14 167517 15
ODISHA 5244 387049 15 146677 16
ANDHRA PRADESH 7302 376058 16 495042 8
JHARKHAND 3147 266187 17 77778 20
CHHATTISGARH 2842 181686 18 108848 17
ASSAM 2989 174628 19 83386 18
UTTARAKHAND 2146 172192 20 58259 22
JAMMU & KASHMIR 1774 144752 21 73770 21
HIMACHAL
1632 119293 22 35821 23
PRADESH
GOA 660 88848 23 20999 24
CHANDIGARH 388 87391 24 81334 19
TRIPURA 574 30349 25 12110 26
MEGHALAYA 365 26508 26 8898 27
PUDUCHERRY 265 23189 27 14461 25
ARUNACHAL
169 18006 28 5102 31
PRADESH
DADRA AND
103 12848 29 4249 32
NAGAR HAVELI
NAGALAND 182 12774 30 5500 29
MIZORAM 218 12622 31 7379 28
MANIPUR 215 12248 32 5271 30
SIKKIM 160 10863 33 4204 33
ANDAMAN &
71 6473 34 2884 34
NICOBAR ISLANDS
LADAKH 76 6386 35 2570 35
LAKSHADWEEP 13 1291 36 100 36
All India 151143 15939889 11159434
Source: Quarterly statistics issued by R.B.I.-Sept. 2021.

As per RBI quarterly statistics statement & bankers committee, Karnataka stands 4th
in position below the states of Maharastra, NCT of Delhi & Uttar Pradesh in terms of
aggregrate deposits and gross credit in India as shown in the above table.

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5.5.1.5 Performance of Scheduled Commercial & Other banks.

The aggregrate deposits of all the banks (commercial, RRBs and cooperative) stood
at Rs.1151506.96 Crore as at the end of March 2021 , an increase of Rs. 148932.12 Crore
compared to last year (March 2020), registering an growth of 14.85 %. Similarly, the total
outstanding advances of all the banks in the state stood at Rs. 802100.14 Crore as against
the level of advances of Rs 749651.43 Crore recorded a year ago indicating a growth of
6.99%. The Credit Deposit Ratio (C-D Ratio) of the state as on March 2021 is 70 percent,
which has decreased compared to previous year as shown in the below table.

Sl.
Indicator Unit 2018-2019 2019-20 2020-21
No.
1 Branch network
A) Commercial Banks
(including 5 SFB & 2 Pay- No. 8260 8563 8753
ment bank)
B) Regional Rural Banks No. 1816 1775 1763
C) Co-operative Banks etc. No. 1064 1131 1139
Total No. 11140 11469 11655
2 Deposits
A) Commercial Banks
(including 5 SFB & 2 Pay- Rs.in Crore 820427.32 919313.13 1059484.9
ment bank)
B) Regional Rural Banks Rs.in Crore 39329.72 43609.26 47167.67
C) Co-operative Banks etc. Rs.in Crore 35067.52 39652.45 44854.36
Total Rs.in Crore 894824.56 1002574.84 1151506.96
3 Advances
A)Commercial Banks
(including 5 SFB & 2 Pay- Rs.in Crore 647079.68 669214.57 722190.07
ment bank)
B)Regional Rural Banks Rs.in Crore 32627.23 32931.62 36530.43
C)Co-operative Banks etc. Rs.in Crore 35216.75 47505.24 43379.64
Total Rs.in Crore 714923.66 749651.43 802100.14
4 Credit-Deposit Ratio
A)Commercial Banks
(including 5 SFB & 2 Pay- % 78.87 72.80 65.66
ment bank)
B)Regional Rural Banks % 82.95 75.51 77.00
C)Co-operative Banks etc. % 100.42 119.80 91.00
Total % 79.89 74.77 70.00
Source: State Level Bankers Committee (Agenda Notes of 154th Meeting: page nos. 294-296),
Karnataka

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5.5.1.6. Distribution of Priority Sector Advances

The Priority Sector Advances of all the Banks in the State amounted to Rs. 311799 Crore
in March 2021 as against Rs. 285959 Crore as on March 2020 showing an increase of
Rs.25840 Crore. It contributed to 38.87% in total advances, which is marginally lower
than the stipulated 40% by RBI. The Agricultural advances stood at Rs. 149082 Crore
constituting 18.59% of total advances in March 2021 which is above the stipulated
18% by RBI. Credit disbursed by the banks towards the MSME sectors stood at Rs.
103830 Crore as against Rs. 102811 Crore as on March 2020. Similarly, Advances to the
weaker section stood at Rs. 87867 Crore as on March as against Rs. 77378 Crore as on
March 2020. Details of the Priority Sector Advances is as shown in the below table.

( Rs. in Crore)
March 2019 March 2020 March 2021
Indicator % to Total % to Total % to Total
Advances Advances Advances
Advances Advances Advances
Total Advances 714923 - 749651 - 802100
Total Priority Sector
293743 41.08 285959 38.15 311799 38.87
Advances(PSA)
Agriculture 129913 18.17 130905 17.46 149082 18.59
MSMEs 119027 16.64 102811 13.70 103830 12.94
Weaker Sections 95694 13.38 77378 10.32 87867 10.95
Source: State Level Bankers Committee (Agenda Notes of 154th Meeting: page no. 18, 220), Karnataka

5.5.1.7. Progress under Kisan Credit Card Scheme in Karnataka

No. of live KCCs as on

Name of the Agency Percentage
30.09.2021
Scheduled Commercial Banks 1417227 33.28%
RRBs 631450 14.82%
Cooperative Banks 2210027 51.90%
Grand Total 4258704
Source: State Level Bankers Committee (Agenda Notes of 155th Meeting: page no. 114), Karnataka

Karnataka has made considerable progress under Kisan Credit Card Scheme, totally
4258704 No. of KCC Cards have been issued as on 30.09.2021 as can be seen in the table
above. Out of these total no. of KCCs, SCBs (Scheduled Commercial Banks), RRBs & Co-
op Banks have issued 1417227(33.28%), 631450(14.82%), 2210027(51.90%) no. of KCC cards
consecutively.

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5.5.1.8 Performance under Annual Credit Plan (ACP) during last 5 years from
2016-2017 to 2020-21

( Rs. in Crore)
2016-17 2017-18 2018-19 2019-20 2020-21
Indicator
Target Ach. Target Ach. Target Ach. Target Ach. Target Ach.
Crop Loan 48,908 39,056 58,563 33,539 64,972 37,824 72816 57804 66018 69910
Term Loan 23,983 40,181 28,127 55,566 33,682 31,879 42122 33733 46181 56547
Total Agri. 72,891 79,237 86,690 89,105 98,654 69,703 114938 91537 112199 126457
Percentage : Achievement to target
Crop Loan 79.85 57.27 58.22 79.38 105.90
Term Loan 167.53 197.55 94.65 80.08 122.45
Overall 108.70 102.78 70.65 79.64 112.71
Source: NABARD, Regional Office, Bangalore.

The achievement under Agriculture Term Loan which ranged from 78% to 91% during
2010-11 to 2013-14, has increased to 167% in 2016-17 and 197.55% during 2017-18. Though
the Agriculture Term loan lending dipped during 2018-19 and 2019-20, it exhibited an
upward growth of 122% during 2020-21. The overall achievement in Agriculture lending
as on 31.03.2021 is pegged at 112.71% of the target.

5.5.1.9. Non Performing Assets (NPA) in Banks

There were 1873285 Non Performing Assets (NPA) a/cs involving an amount of Rs.56337.41
Cr as of September 2021 accounting for 7.63% of total advances. NPA across the type of
Banks is shown in the below table

( Rs. in Crore)
As on 30/9/2020 As on 30/9/2021
Indicator
A/Cs Amount A/Cs Amount
Commercial 2219685 50289.97 1468284 49083.60
RRBs 308116 4006.94 358317 5534.99
Cooperatives/KSFC 272746 2773.11 46684 1718.82
Total 2800547 57070.02 1873285 56337.41
Source: State Level Bankers Committee (Agenda Notes of 154th Meeting: page no. 307), Karnataka

5.5.2 NABARD

5.5.2.1 High Level Committee (HLC) to review the health of Cooperative institutions

A High Level Committee (HLC) under the Chairmanship of Additional Chief Secretary
and Development Commissioner , GoK with Principal Secretary, Cooperation, RCS,
Regional Director, RBI and Official from Apex Bank as well as KSCARDB constituted
by NABARD to review the financial health of Cooperative institutions in the State vide
GO.No.CO375 CLS2017 dated 13 September 2017. NABARD convenes the Committee

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meeting at half yearly intervals to discuss various financial parameters as well as frauds,
governance issues of Cooperative institutions in the State. During 2020-21, two such
HLC meetings were convened. While the first meeting discussed in detail, the health of
long term cooperatives (KSCARDB) especially improvement to be brought about in the
recovery mechanism, the HLC meeting held during March 2021 discussed issues relating
to health of Kalaburgi & Yadgir DCCB, status of Fit & Proper Criteria of CEOs and Directors
in DCCBs, cooperative banking Ombudsman Scheme, Fraud position of bank/internal
checks and controls, as also issues pertaining to Government Guarantee and recovery at
the level of KSCARDB. During 2021-22, the HLC was held in November 2021 wherein issues
pertaining to performance and turnaround of DCCBs, adherence to Fit & Proper criteria
of RBI by CEOs and Board of Directors, steps taken by DCCBs in addressing occurrence
of frauds and PACS computerization.

5.5.2.2 Institutional Development – Regional Rural Banks (RRBs)

(a) Subsequent to amalgamation of RRBs, the State has two RRBs namely Karnataka
Vikas Grameena Bank (KVGB) headquartered at Dharwad with 629 branches, Karnataka
Gramin Bank(KaGB) headquartered at Ballary with 1134 branches as on 31.03.2021
(formed by amalgamation of Pragathi Krishna Grameena Bank and Kavery Grameena
Bank).

(b) During 2020-21, both the RRBs in the State have been making profits and are
sustainably viable with CRAR above 9%. NABARD has carried out the inspections of the
two RRBs for position as on 31 March 2021. Accordingly, while the CRAR of KVGB stood at
11.31%, for KaGB, the same was 11.80%.

(c)The performance of the RRBs are reviewed by the Empowered Committee meeting
convened by RBI at quarterly intervals. For 2020-21, the 81st EC meeting was convened on
12th June 2020 and 82nd EC was held on 29th December 2020. As part of review, NABARD
discussed issues pertaining to performance of the two RRBs in terms of achievement
under ACP, increasing NPAs, need for improving agri term lending, financing of SHGs,
Government Sponsored schemes, etc. The first meeting for 2021-22, ie., 83rd EC was held
on 13 July 2021. Deputy General Managers of NABARD who are on the Board of the RRBs
as also General Manager handling Institutional Development attend the meeting.

5.5.2.3 Status of SHG in Karnataka

Cumulative Number of SHGs Saving linked as on 31.03.2021 (Number of live

784815
SB accounts of SHGs)
Bank Loan disbursed during the year 2020-21 (Rs Crore) 8445.87
No. of SHGs with loan outstanding as on 31.03.2021 612742
Bank Loan outstanding as on 31.03.2021 (Rs Crore) 11882.75
Average Loan per SHG issued (Rs lakh) 1.93
Percentage of Women SHGs 92%
Source: NABARD, Regional Office, Bangalore

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5.5.2.4 Digitisation of SHGs – EShakti project

In line with the Prime Minister’s vision for a digital India, NABARD launched a pilot project,
“E-Shakti”. Presently, the project has progressed into a unique digital financial inclusion
movement covering 100 districts in 22 States and one Union Territory across the length
and breadth of the country and has already digitized 12.69 lakh SHGs benefitting 145.73
lakh rural poor at national level (as on 17.12.2021). The project is in covering 250 districts in
the country.

5.5.2.5 Impact of RIDF in the state

Under RIDF tranches I to XXVII, as on 20 December 2021, 43695 projects have been
sanctioned to Karnataka State with RIDF loan of Rs 16568.40 Crore. Against the sanctioned
amount, GoK has drawn Rs 12940.06 Crore. The sector wise sanction and disbursements
details are as given below:

Rs. in Crore
No. of Total Financial Loan Amount
Name of the Sector
projects Outlay Sanctioned Disbursed
Agriculture and allied
4919 1769.44 1607.97 1187.61
projects
Social sector projects 21001 5540.55 4509.94 2720.43
Irrigation projects 5202 4724.26 3908.92 3079.06
Rural roads and bridges 12573 8024.73 6541.57 5952.96
Total 43695 20058.98 16568.40 12940.06
Source: NABARD, Regional Office, Bangalore

40% of RIDF loan has been sanctioned to Social Sector Projects. The share of Agri and
allied and Rural Connectivity were of the order of 33% and 27% respectively.

The sanctioned projects on completion will provide the following benefits:

RR Irrigation infrastructure- 4.78 Lakh Ha brought under Irrigation.

RR Agriculture & Allied- 1684 Veterinary Institutions, 853 Infrastructure projects in Rural
Markets, 258 Raita Samparka Kendras, 33 Fish Jetties, 10 Cocoon Quality Testing Labs
and 3 Pesticide Residue Labs.
RR Social Sector- 13353 Rural Education Infrastructure projects (Primary & Secondary
schools, PU colleges, Polytechnic, ITI, GTTC, agriculture & horticulture colleges etc),
6472 Anganwadis, , 337 Health Infrastructure Projects (PHC, CHC, MCH)
RR Connectivity- 45336 km of Rural Roads and 60300 m of Rural Bridges.
5.5.2.6 Farmers Producers Organization (FPOs)

RR Collectivization of agricultural produce through Producer Organizations (POs) is one

of the most effective means of linking Small and Marginal farmers / Producers with
the agricultural value chain for the purpose of enhancing their net income.
RR Since 2014 -15, NABARD Karnataka Regional Office has assisted in promotion of 263

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FPOs covering 30 districts of the State. These FPOs have been formed through 80
odd NGOs / Institutions acting as Producer Organization Promoting Institutions
(POPIs). Around 1,26,664 farmers of the State are members of FPOs promoted by
NABARD supported POPIs involving grant assistance of Rs. 24.53 cr. Out of the 283
FPOs, 268 are registered under various acts thereby mobilizing share capital of Rs.13.32
Cr. Out of these 283 FPOs,10FPOs had availed SFAC grant and 68 FPOs were credit
linked availing loan to the extent of Rs.18.14 Cr. Majority of the FPOs are involved in
production, procurement and marketing of various Agri - Horti crops. Some of the
FPOs are also taking up the activities of promoting High Value Crops such as chia
seeds, tender coconuts, coffee, udipimattigulla, etc
Achievements and Way Forward – NABARD

Achievements

National Bank for Agriculture and Rural Development (NABARD) has been playing a
lead role in the socio-economic development of the State of Karnataka through various
business, promotional, institutional and policy interventions. Following are major
operations of NABARD in Karnataka:

(i) Provided financial support of Rs.20,250 Cr. for the year 2020-21 and Rs.20,000 Cr. for
the year 2021-22 (as on February 2022) for rural lending to banks and other financial
institutions in Karnataka under Production and Investment Credit.
(ii) Under Rural Infrastructure Development Fund (RIDF), sanctioned Rs.1100 crore and
Rs.2000 crore during 2020-21 and 2021-22 (as on Feb 2022) respectively to State
Government for developing rural infrastructure. The cumulative sanctions and
disbursement for Karnataka under RIDF as on February 2022 are to the tune of
Rs.17,000 Cr. and Rs.13,000 Cr. respectively for 43822 projects. With this assistance,
additional irrigation potential of around 5 lakh hectare has been created and around
45000 kms of rural roads were completed besides creation of rural markets, storage
godowns, veterinary health infrastructure etc.
(iii) Grant assistance provided to NGOs, training institutions, SHG federations etc., for skill
training, building micro enterprises, etc., which has benefitted around 3000 SHG
members.
(iv) Grant support provided to Cooperative Banks and RRBs in the state towards financial
inclusion, capacity building of BC/ BFs etc., and also to promote technology adoption
of these institutions like on-boarding to BBPS/ Green PIN facility, micro-ATMs/ PoS
machines etc.
(v) Special focus has been given for promotion and nurturing of FPOs. Around 320 FPOs
have been promoted by NABARD covering over 1 lakh farmers as members.
Way Forward

While the existing business and promotional operations will continue, the focus areas for
NABARD in the coming years are as follows:

RR Transformation of Primary Agriculture Cooperative Societies (PACS) as Multi-Service

Centre (MSC) in Karnataka State to saturate all the potential PACS

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RR Targeted Infrastructure Development in Tier 3 & 4 towns

RR Strengthening Agri-Value Chain infrastructure
RR Water Resource Management
RR Renewable Energy
RR Strengthening farmer institutions like SHG Federations, FPOs/OFPOs, PACS etc. in
terms of governance, business diversification and profitability
RR PACS computerisation through integrated efforts with State Government in tune
with GoI schemes and guidelines issued from time to time

5.5.3. Industrial Finance

Karnataka State Financial Corporation (KSFC) is a State Level Financial Institution

established by the State Government in the year 1959 under the provisions of SFCs Act, 1951
to cater to the long term financial needs of Micro, Small & Medium Enterprises (MSMEs)
in the State of Karnataka. KSFC takes pride being pioneer in serving MSMEs of industrial
and service segments in the State for past the 62 years. The cumulative Gross Sanctions
of the Corporation reached Rs.18,286.38 Crore covering 1,74,662 units as on 31.3.2021. Since
inception upto the end of March 2021, 31.069 units promoted by Women Entrepreneurs
were assisted to an extent of Rs.4368.47 Crore, 21,892 cases promoted by Scheduled Caste
& Scheduled Tribe Entrepreneurs were assisted to an extent of Rs. 2,266.14 Crore and Rs.
1,351.64 Crore was sanctioned to 19,292 cases promoted by Entrepreneurs belonging to
the Minority community.

Details of Sanctions and Disbursements made by KSFC

( Rs. in Crore)
2021-22
Particulars 2018-19 2019-20 2020-21
(30.11.2021)
Sanctions 1098.73 667.81 401.66 196.58
Disbursement 665.9 727.9 432.96 223.56
Source: KSFC

During the FY:2021-22 (April 2021 to November 2021) the Corporation assisted 211 cases to
an extent of Rs.196.58 Crore, disbursed Rs.223.56 Crore and recovered Rs.442.67 Crore.

5.5.4. Karnataka State Industrial and Infrastructure Development Corporation

(KSIIDC)

KSIIDC, established in 1964, has been greatly instrumental in the industrialization of the
State, especially in the large and medium sector. KSIIDC has stopped financial lending
activity since October 2002 onwards. At present, recovery of the past lending/advances
and loans and disinvestment of Equity are the main activity. However, certain Investments
as per the directions of Government of Karnataka are being made from time to time.

KSIIDC continued its proactive role in the promotion of infrastructure projects on Public
Private Partnership model and its role as Nodal Agency for Bangalore International

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Airport Project. Duly noting the initiatives taken up by KSIIDC in the infrastructure sector,
the name was changed to “Karnataka State Industrial and Infrastructure Development
Corporation Limited” with effect from November 22, 2010.

5.5.5. Co-operative Credit:

The Cooperative credit system in Karnataka has its own place in the credit delivery of rural
and urban areas. Apart from urban cooperative banks, the major Primary Agricultural
Cooperative Society/Banks are operating in rural areas. Unlike in other states, in Karnataka
two types of Cooperative Credit Institutions are functioning, one is looking after short
term and medium term credit and another looking after credit needs of long term.

5.5.5.1. Short term and Medium term Credit Co-operative Structure (STCCS):

The Karnataka State Cooperative Apex Bank through its affiliated District Central
Cooperative Bank (DCCB) and Primary Agriculture Cooperative Societies (PACS) at the
village level extends short term credit to the farmers and others. The total number
of DCCBs is 21 with 818 branches. There are 5751 PACS functioning in the state. These
institutions have prepared Business Development Plan (BDP) with a view to strengthen
capital base of their financial and organization set up in accordance with guidelines of
NABARD, an MOU is signed by NABARD, State Government and Apex bank in June 1995,
same was extended from time to time.

As on 31-3-2020 the working capital of DCCBs was Rs.42671.84 Crore. As on 31-03-2021

it had grown to Rs.49272.07 Crore indicating a growth of 15 per cent. The total amount
of Deposit in DCCBs was Rs. 28093.45 as on 31-3-2020. It had grown by 15 per cent to Rs.
28563.28 Crore as on 31-3-2021. During 2020-21 all the 21 DCCBs in the State have shown
profits. These credit institutions provide short, medium and long term credit to PACS
and other societies at gross root level and deal directly with individual borrowers also.

Consolidated Financial Status of DCCB (Rs Crore)

Particulars 2018-19 2019-20 2020-21 2021-22 (June)

No of DCCBs 21 21 21 21
Total share capital 1445.41 1636.12 1721.47 1902.25
States’ share capital 25.03 25.04 30.50 32.50
Share of the State in Share Capital 1.73% 1.53% 5.21% 1.71%
Deposits 24895.81 28093.45 28563.28 31189.01
Borrowings 8992.67 10070.72 10823.46 11619.69
Loans & Advances Outstanding 24608.81 28492.57 30757.46 33631.44
Banks showing profit 21 20 21 21
Source: Additional Registrar of Cooperative Societies, Bangalore.

5.5.5.2. Long Term Credit Cooperative Credit Structure (LTCCS):

Karnataka State Cooperative Agriculture and Rural development Bank (KASCARD) at the
State level and Primary Cooperative Agriculture and Rural Development Bank at taluk

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level numbering 177 cater to the long term credit needs in the two tier credit delivery
system. The National Bank for Agriculture and Rural Development (NABARD) provides
refinance to the KASCARD Bank.

Achievements, Challenges and Way forward

Cooperatives Achievements

1. During the year, Rs. 17735.28 crore of agricultural loan has been disbursed to 16.19 lakh
farmers as against the target of Rs.15702.50 crore of loan to 25.12 lakh farmers, achieving
113%. Cooperative institutions have covered approximately 38% of the farmers in the
state.

2. Co-operative institutions have disbursed Rs. 100 crore of working capital loans for Dairy
and Animal husbandry to 65,000 farmers, which stood among 1st in the entire country
in giving the KCC cards to dairy farmers.

3. Under the Agri Infra Fund scheme of Atma Nirbhar scheme of Central Government
Rs.306.68 crore loan has been sanctioned by NABARD to 885 PACS, which stood at 4th
largest state in the scheme in the entire country.

Challenges

1. Though cooperative banks could cover 38 % of the farmers in the state, average short
term agri loan to farmers from cooperative institutions have stood at Rs.64,826 per
farmer much lesser than commercial banks due to the fund availability to cooperative
banks.

2. Though 5751 Primary Agricultural Credit Cooperative Societies are operating in rural
areas covering all the villages in the state. They have been restricted to do only credit
business without giving banking facilities to rural population either as small savings
bank or business correspondent of DCC banks.

3. Out of 5751 PACS, approximately 2000 pacs have been computerized on their own,
which has become the main obstacle to monitor the business growth development
of these PACS.

4. DCC banks deposit position is weak compared to commercial banks as these banks
are not scheduled banks and not able to acquire the new digital technology.

Way forward

1. NABARD can increase the refinance facility from present 60% to 75% to DCC banks
operating in back ward districts and drought prone districts in order to increase the
per capita crop loan to farmers of Cooperative institutions.
2. It has been proposed to computerize all the working PACS in the state with the
collaboration of Centre, State and PACS in the next 3 years.
3. RBI may consider PACS as small savings banks and allow them to extend banking
facilities to rural poor as given to post offices so that state and centre govt grants can
be delivered to rural population at their door step.

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4. All DCC banks can be merged to Apex Bank to reduce the overhead cost, increase the
lendable resource and there by provide loans to members at lower interest rate.
5.6 Rural Credit Reforms- “A Single Window Credit Facility” for increasing credit flow
to Self Help Groups and rural Karnataka.

Lack of direct bank credit linkages to SHG’s and rural poor leading to higher interest
credit through various private sources like MFI’s, NBFC’s, Fin-tech BC’s and money
lenders resulting in rural credit distress.

Banks have not been actively lending directly to SHG’s due to not having the capacity,
deeper rural presence, technology and rural lending expertise.

Proposed Solution:

Enabling a technology driven ‘Single window credit facility’ through regulated 1 or 2

intermediary partners (Execution Partner – PPP Model) to increase credit flow to SHG
women and rural Karnataka.

In the model PSB alliance to bring together all the public sector banks under one umbrella’
(Lenders) to facilitate loans at regulated rates and practices. One of the PSB’s may be
nominated as the ‘Anchor Bank’, which takes the lead in mobilizing the participant PSB’s,
RFPs for the implementing partners and drives implementation of the service.

Advantages:

RR Regulated interest rates for the SHG’s and their communities

RR 30 Lakh SHG women directly benefit from the initiative
RR Jobs / Livelihood creation support for rural poor
RR Digital lending reducing Turn-around-Time and frauds
RR Better monitoring of the small credit to underserved segments
RR One-Stop-Shop approach reducing disparities
RR Data authenticity through a single source i.e., PSB alliance partners
5.7 Conclusion and Way Forward

Karnataka is a relatively underbanked state and is behind comparable states across

parameters related to financial sector development. Karnataka should increase the bank
credit to GSDP ratio to 50%, which could generate additional growth of 1.42% to its GSDP.
The following policies are recommended for the development of the financial sector in
Karnataka

1. State Level Bankers Committee (SLBC) currently sets sector-wise targets for banks
in both the priority and non-priority sectors. As Karnataka performs poorly in its
credit allocation to the transport and trade sector relative to other states, SLBC must
significantly increase the lending targets for these sectors

2. State Government should encourage and incentivize banks to open branches in rural
centers (URCs). The state government business can be made conditional for banks

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on the fulfillment of a minimum number of branches or BC outlets being opened in

URCs. Priority should be given for opening branches in districts with the lowest per
capita branches. The state government should set goals to open bank branches in all
villages with more than a population of 5000 and banking correspondent outlets (BC
outlets) in villages with more than a population of 2000.

3. As the MUDRA scheme covers only loans up to Rs.10 lakh, many small businesses
with higher credit requirements are financially constrained. The state government
can design a government guarantee scheme in line with CGTMSE to encourage
lending to small and medium enterprises in specific sectors identified as highly credit
constrained. However, creation of a credit gurantee fund at state level may have huge
financial implications.

4. Equip cyber cells with relevant tools and technologies to ensure quick disposition of
digital payments-related fraud cases. The state government can consider framing
legislation to codify all frauds associated with digital payments and prescribe strict
punishment to create deterrence.

5.8. References

Research article, Ang, J. & Madsen, J. B. Risk capital, private credit, and innovative
production.Canadian Journal of Economics,45(4), 2012 1608.1639.

Research article, Banerjee, A. V., and Duflo, E. Do firms want to borrow more? Testing
credit constraints using a directed lending program. The Review of Economic Studies,
2014, 81(2):572– 607

Research article, Beck, T., Levine, R. & Levkov, A. Big bad banks? The winners and losers
from bank deregulation in the United States.The Journal of Finance, 2010, 65(5), 1637-1667

Research article, Burgess, R. & Pande, R. Do rural banks matter? Evidence from the Indian
social banking experiment. American Economic Review, 2005 95(3):780–795.

Research article, Cecchetti, S. & Kharroubi, E. Reassessing the impact of finance on

growth, BIS Working Paper, 2012

Thesis, Cramer, K Bank presence and health, Columbia Business School Job Market
paper, 2021

Research article, Gaurav, S, & Krishna, J . How efficient are co-operative banks, Economic
and Political Weekly, 2017, Vol 52 Issue No 12

Research article, Guiso, L., Jappelli, T., Padula, M. & Pagano, M. Financial market integration
and economic growth in the EU. Monetary Policy, 2004, 19(40), 524-577.

Research article, Ilyina, A. & Samaniego, R. Technology and Financial development.

Journal of Money, Credit and Banking, 2011, 43(5), 899-921.

Research article, King, G. & Levine, R. Finance and Growth: Schumpeter Might Be Right.
Quarterly Journal of Economics, 1993, 108(3), pp. 717–37

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Research article, Levine, R. Finance and growth: theory and evidence. In Aghion, P., and
Durlauf, S. N., editors, Handbook of Economic Growth, Volume 1A, 2005 pages 865–934.
Elsevier, Amsterdam

Research article, Mannil, N., Nishesh, N. & Tantri, P. Medicine or Addictive Drug? The
Vicious Cycle of Regulatory Forbearance

Report, Report of the Expert Committee on Urban Co-operative Banks, Reserve Bank of
India, 2021

Research article, Popov, A. & Zaharia, S. Credit market competition, and the gender gap:
Evidence from local labor markets, 2016, ECB mimeo.

Research article, Svaleryd, H. & Vlachos, J. Financial markets, the pattern of industrial
specialization and comparative advantage: Evidence from OECD countries. European
Economic Review, 2005, 49(1), 113-144.

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Annexure 5.9

Annexure 5.1 – District-wise co-operative bank credit as a share of total bank credit and
other economic variables
Cooperative Per Capita Poverty 10-year CAGR in Per
District
Bank share NDDP rate Capita NDDP(2010-2020)
Bagalkote 21.03% 163875 31.1 19.8%
Bengaluru Rural 2.62% 196658 11.3 11.1%
Belagavi 15.09% 113608 16.4 12.9%
Ballari 4.84% 161715 28.8 13.6%
Bidar 38.67% 100234 25.5 16.0%
Vijayapura 19.19% 104190 30.4 14.1%
Chamarajanagar 1.87% 139006 23.8 21.4%
Chickballapur 4.44% 130430 23.1 17.9%
Chikkamagaluru 7.62% 250119 13.1 23.2%
Chitradurga 3.16% 119191 20.9 17.0%
Dakshina Kannada 7.92% 351271 6.4 22.1%
Davangere 3.00% 122546 16.8 14.2%
Dharwad 1.16% 162131 13.5 12.7%
Gadag 1.16% 115187 30.2 15.0%
Kalaburagi 1.90% 99322 29.7 13.6%
Hassan 8.14% 157301 11.6 18.6%
Haveri 1.16% 112383 20.5 15.9%
Kodagu 16.60% 130264 10.5 3.5%
Kolar 4.44% 133084 14.8 14.8%
Koppal 3.87% 100497 30.8 11.5%
Mandya 12.49% 172467 10.9 22.9%
Mysuru 1.87% 142383 9.4 11.7%
Raichur 3.87% 105654 36.1 15.7%
Ramnagara 2.62% 179519 12.4 15.8%
Shivamogga 7.59% 205368 16.4 22.1%
Tumakuru 4.46% 174884 19.4 21.9%
Udupi 7.92% 284521 11.7 20.8%
Uttara Kannada 34.09% 155582 16.3 17.4%
Yadagiri 1.90% 97353 49.0 16.3%
Bengaluru Urban 2.62% 496208 1.9 15.3%
Source: Karnataka State Co-operative Apex Bank Website, Economic Survey Karnataka 2020 & 2010,
NFHS Multi-dimensional poverty 2015-16

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Annexure 5.2 – District-wise share of villages with bank branches

District % Villages with bank branches
Semi-urban Rural
Bagalkote 100.0% 15.0%
Bengaluru Rural 100.0% 16.9%
Belagavi 87.7% 16.4%
Ballari 100.0% 19.3%
Bidar 100.0% 10.6%
Vijayapura 95.0% 15.8%
Chamarajanagar 100.0% 11.5%
Chickballapur 100.0% 5.4%
Chikkamagaluru 100.0% 10.3%
Chitradurga 87.5% 10.2%
Dakshina Kannada 93.3% 38.1%
Davangere 77.8% 9.7%
Dharwad 100.0% 19.0%
Gadag 100.0% 18.1%
Kalaburagi 93.8% 9.4%
Hassan 100.0% 6.0%
Haveri 100.0% 14.1%
Kodagu 100.0% 23.5%
Kolar 100.0% 4.9%
Koppal 88.9% 9.3%
Mandya 100.0% 8.3%
Mysuru 80.0% 9.6%
Raichur 94.7% 7.6%
Ramnagara 100.0% 8.4%
Shivamogga 100.0% 7.5%
Tumakuru 100.0% 4.9%
Udupi 92.9% 52.9%
Uttara Kannada 94.4% 7.7%
Yadagiri 100.0% 7.9%
Source: RBI MOF Branch locator; Population Census 2005, 2011

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Annexure 5.3 – Comparison of Underbanked Districts and Banked Districts during 2004-
05 to 2012-13 (RBI policy incentivized opening branches in underbanked districts in this
period)
Growth in Change in Increase in
Credit
District the number per capita the number of Status
Growth
of Branches NDDP establishments
Bengaluru Rural 11.5% 16.3% 20.4% 37.5% Previously
Underbanked
Bidar 4.5% 13.1% 16.8% 15.8%
Districts
Chamarajanagar 5.5% 19.2% 13.8% 56.5%
Kalaburagi 4.2% 15.9% 15.0% 31.1%
Koppal 5.4% 21.1% 20.7% -4.3%
Raichur 6.0% 22.0% 16.5% 16.0%
Average 6.2% 17.9% 17.2% 25.4%
Bagalkote 5.4% 20.0% 14.9% 19.4% Previously
Banked
Belagavi 3.9% 14.1% 14.6% -17.9%
Districts
Ballari 4.8% 19.9% 13.1% 22.8%
Vijayapura 4.4% 18.1% 15.5% 9.7%
Chikkamagaluru 3.3% 13.1% 12.1% 27.7%
Chitradurga 3.1% 15.1% 14.9% -20.5%
Dakshina 4.8% 8.5% 12.9% 33.3%
Kannada
Davangere 2.8% 18.5% 14.5% 5.7%
Dharwad 4.6% 14.0% 16.2% 8.1%
Gadag 5.6% 16.8% 15.0% -5.0%
Hassan 3.0% 15.0% 15.7% -6.1%
Haveri 6.2% 16.6% 13.4% 11.2%
Kodagu 1.9% 9.6% 16.4% -28.6%
Kolar 3.1% 16.0% 17.4% 29.5%
Mandya 2.3% 15.5% 14.2% 34.5%
Mysuru 4.4% 13.2% 14.9% -43.8%
Shivamogga 3.6% 11.3% 14.9% -5.3%
Tumakuru 3.5% 17.0% 16.0% 14.8%
Udupi 3.9% 4.9% 16.3% 10.4%
Uttara Kannada 3.8% 0.7% 15.5% 16.4%
Average 3.9% 13.9% 14.9% 5.8%
Source: RBI Quarterly district-wise credit, offices and deposits; Economic Survey of Karnataka 2005,2013;
Economic Census 2005, 2013;

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