Bank loans and their role in the economy of India

Bc. Rajviben Naimishkumar Raval

Master's thesis

Abstract:

AbstractThe research, “Bank Loans and their role in the economy of India” targets to examine the impact of lending carried out by banks on a microscopic as well as a macroscopic level on the economy of India. It majorly illustrates a study on credit system of banks, classification of the bank loans focusing on scheduled commercial bank loans. The study also reveals a clear picture of Indian economy. There were many incidents in the history of India which highly affected Indian Economy and the banking sector. Those incidents and effects were also studied and discussed in this research. Variety of parameters, namely, inflation, job creation, GDP vs. credit from organized financial sector were taken under consideration. The study is conducted on secondary data collected mainly through Reserve bank of India official statistical outline. Further, the collected data has undergone variety of statistical tools and explicated thoroughly. Apart from that, the researcher also tried to understand the impact of credit by financial institutions in India. The underlying study has also elucidated to gauge the impact caused by Non-Performing Assets (NPA) on the economy on the broader level. Objectives:1.To analyze the impact of loans from organized sector on gross output in India.2.To understand the relationship between bank loans and inflation in India.3.To observe the role of non-payment of loans on banking institutions performance4.To find out the effect of bank loans on job creation in India. Hypothesis: Hypothesis 1:H0: There is no significant impact of Bank Loans on Gross Domestic Product in India.H1: There is a significant impact of Bank Loans on Gross Domestic Product in India.Hypothesis 2:H0: There is no significant relationship between bank loans and inflation in India.H1: There is a significant relationship between bank loans and inflation in India.Hypothesis 3:H0: There is no significant difference between Gross Advances and NPA’s in India.H1: There is a significant difference between Gross Advances and NPA’s in India.Hypothesis 4:H0: There is no significant relationship between gross advances and NPAs in India.H1: There is a significant relationship between gross advances and NPAs in India.Hypothesis 5:H0: There is no significant impact of bank loans on job creation in Banks in India.H1: There is a significant impact of bank loans on job creation in Banks in India. Results, Conclusion and Recommendations •The research was conducted based on bank loans, for the purpose of understanding whether the bank loans are impacting key economic indicators are not? To perform the study secondary data was gathered from the authentic and reliable source i.e. statistical tables of reserve bank of India. This data has undergone statistical analysis with appropriate tools, namely, descriptive statistics, correlation, t-test and linear regression analysis. The inference drawn has shown significance of the test. To understand and explicate the SPSS software and MS-excel were used profoundly. •The researcher has observed that the bank loans are playing a major role in all respects. It was observed that GDP is highly correlated with bank loans and the credit GDP ratio is almost around 50% in India. The linear regression model has depicted that the impact of rise in loans is ultimately leading to rise in money supply in the market and hence the output generated is hence ascending accordingly. •However, this rise then created a rise in general price levels. The same is revealed in the study, that the bank loans through scheduled commercial banks are highly related to country’s inflation indices. Ergo, it can be said that the rise in bank loans leads to rise in inflation. •Moreover, the study also revealed that the number of bank employees are also in pace with the advances through banks. Which reveals that with the rise in amount of loans, number of bank employees are also levitating. •Furthermore, the study has also elucidates the

Abstract:

impact of non-performing assets on bank’s performance. It was observed that the percentage of non-performing assets is very much significant in the overall percentage of bank loans. While the percentage of NPA in gross advances differs in priority and non-priority sector loans. In priority sector lending percentage of non-performing loans are falling with the following years in contradiction to non-priority sector loans.•Since the first step of economic liberalization, the banking industry experienced a major change; hence the value of credit management has emerged. Because of the mounting of NPA, banks are very careful in extending loans recently. Indian banks are doing their utmost to reduce NPA and will certainly succeed in finding the right legislative and diplomatic ways to recover it.•NPAs contribute significantly to the country's numerous aspects of banks 'workings. The 1992 and 1998 reforms of the banking sector ensured the better functioning of public sector banks in the country. Different business divisions of banks related to financial performance, profitability, measuring quality, asset-liability management and risk management, etc. NPAs deal with certain aspects of the role of banks as NPAs have effects on the profitability of banks. NPAs are derived from under-recovery or from inability to recover loans and advances, i.e. credit facilities of banks. (RBI)•Looking at the rising inflation due to increased bank loans in the economy, demand for bank loans is increasing year on year. This then leads to levitating write-offs and the overburdened economy. . However, in long term this may lead to even terrible impact and can be pre-math of some economic crises. Recommendations:•Indian Banking system should be better able to take lessons from past crises. Banks should be very vigilant to keep the same situation from happening again. They should behave like business companies when interacting with their clients and government agencies, while other operating operations such as recruitment, surveillance, running projects, and HR policies should behave. Banks should follow standard trends of consumer lending undertakings.•Bank productivity should be accurately assessed. Bench profitability calculations can be made by evaluating interest income, non-interest income, interest expenses, and operating costs etc. in relation to total bank assets. In this regard, portfolios of income recognition, capital adequacy criteria, asset classification, provisioning, and expenditure should be part of the prudential norms suggested in the RBI guidelines by the Reforms Committees to improve NPA conditions in banks.•Necessary policy interventions are to be taken in order to mitigate the impact of over-leveraged businesses. Government has to implement strategic structural changes in the economy. Mere monetary policy changes will not be sufficient enough to manage the economic slowdown in India.•Currently Covid-19 outbreak drastically changes human life and economy of the world. As this tragedy would affect whole economy and human-kind, further research and study can be carried out on the impact of banks and economy due to Covid-19.

Keywords

Secured and Unsecured Bank Loans, Non-Performing Assets, Inflation, Monetary policy, Repo rates and Economic crisis, Credit Score, Job creation, Prime lending rates

Language used: English

Date on which the thesis was submitted / produced: 6. 4. 2020

Thesis defence

• Supervisor: Ing. Pavel Srbek, Ph.D.

Czech University of Life Sciences Prague

Faculty of Economics and Management

Master programme / field:
Economics Policy and Administration / Business Administration