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The contribution of services sector in the economic development of
many countries is steadily growing. In USA, it is more than 70% and in case of
other growing economies like Korea, Philippines, Singapore and China it has
improved from 46.4%, 38,1%, 61.4% and 13.2% respectively in 1970 to 50%, 46%,
68.6% and 24.1% respectively in 2001. In India too, the contribution of
services sector in GDP has gone up from 31.6% in 1970 to 56.1% in 2002-03. Impressive growth in services sector should lead to increased
finance opportunities for the banking industry. However, in India, the
percentage of bank credit to gross value addition to GDP by these sectors is as
under? Industry ? 65%; Agriculture
? 11%; Services ? 14% while the contribution of these sectors to the economy during the
year 2002-03 was as under ? Industry ? 21.8%; Agriculture
? 22.1%; Services ? 56.1% As the economy is changing, the pattern of lending should also
undergo a change. In many developed countries the share of lending to
agriculture is around 10% or very low. In India too, there is slow shift from
traditional financing but services sector is not getting its due share in
finance. According to the latest quarterly estimates of GDP released by the
Central Statistical Organization (CSO), the higher growth in services at 7.4%
and 9.6% during the first and second quarters of 2003-04 is the result of
robust growth in 'trade, hotels, restaurants, transport and communication'
services. Bank's are not very keen in financing the said sub-segments of the
services sector. There could be numerous reasons for lower growth in financing services
sector but some of the important factors,
which are inhibiting financing to services sector may be mentioned as
under ? (i)
There is assets based financing system
in vogue in India, while in services sector normally there are no tangible
assets created. (ii)
Problems of valuation of assets as there
are intangible assets in services sector. (iii)
Assets based collateral system is in
vogue in India. (iv)
Fixed rate of interest system is still
prevailing while in case of services sector preferably floating rate of
interest system should be in vogue. (v)
Bill discounting facility is available
for physical goods only, services sector is not getting this facility so
easily. (vi)
Higher rate of obsolescence in services
sector. (vii)
Services sector is largely unorganized. (viii)
There is no record of the credit history
for units in services sector and the size of the borrowers is also small. (ix)
Intensity of credit requirement of the
service sector is low and valuation of the intellectual property, which is
taken as collateral, is difficult. Banks / Financial Institutions should take suitable steps like formulating
their own policies / products for financing to services sector. The following
methodology for enhancing the flow of credit to services sector should help ? (i)
Adopting Cash flow system in appraising
credit limits. (ii)
Stipulating collaterals on the
case-to-case basis. (iii)
Encouraging discounting of bills from
services sector. (iv)
Securitization of bills of utility
services like telephone bills, cell phone bills, annual maintenance contract
fee, school fee, etc. (v)
A credit guarantee fund for services
sector, similar to the one managed by SIDBI for loans to the small-scale
manufacturing sector, may be set up. There is huge potential for financing trading activities. In the latest Fortune 500 companies, Wall Mart, a departmental store from
USA has become the number one corporate in the world displacing General Motors.
The outlets such as Starbucks in USA have grown into a large chain due to
availability of finance. In India, there are shops and restaurants that have
been around for over 50 years but have not changed much probably because they
mostly rely on their internal financing in the absence of external finance. Trading activities are
gaining ground in India too. Hence banks need to prepare themselves for increasing
financial assistance to services sector,
which includes trade, hotels, transport, communication, financing, insurance,
real estate, business services, community, social & personal services and
construction. One reason why banks are in a position of surplus liquidity is that
they are lending largely to the manufacturing sector while most of the growth
is being contributed by the services sector, as was recently pointed by Shri
Rakesh Mohan, the Dy. Governor, Reserve Bank of India while addressing a seminar
in Mumbai. (The opinions expressed are those of the
individual researcher and do not necessarily reflect those of the Bank or its
Associates) Edited by General Manager, Economic Research
Department, State Bank of India, Corporate Centre, Mumbai.
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