As part of IFMR Finance Foundation’s Working Paper series, Nishanth K & Irene Baby have authored the latest research paper on Determining Optimal Credit Allocation at a District Level.
A fundamental role of the banking and financial sectors is to allocate capital to its most productive use. While India has a deep history of policy making aimed at providing and improving access to formal financial services, large swaths of India still remains unbanked – specifically with respect to delivery of formal credit to rural and excluded regions. Although considerable progress has been made, the extent of exclusion is still vast, and even in sectors, segments and regions that contribute significantly to the growth of the economy.
It is in this context that we contend that the design of credit allocations and targets must account for the potential of economic growth at sub-national level. In this paper, we advocate a class of methods that looks at disaggregated growth responsiveness of districts specifically within the state of Tamil Nadu. Such an approach to credit allocation using elasticity based weighting scale to apportion credit to different districts would help direct credit to the most productive regions and sectors. This could enable policy-making bodies to identify districts with excessive and deficient levels of credit depth and can also inform dynamic, district-level interventions resulting in a more holistic growth.