Determining Optimal Credit Allocation at a District Level

Authors: Nishanth K & Irene Baby, IFMR Finance Foundation – December 2016

Abstract:

In this paper, we attempt to develop a granular understanding of the relationship between credit (as measured by total bank credit outstanding in a district) and economic growth (as measured by Gross District Domestic Product) for 32 districts of Tamil Nadu. Analysing data for these districts from 2004-05 to 2011-12, we compute the output elasticity of credit depth at the district level, while controlling for exogenous factors such as rainfall, infrastructural development and other factors. We find that the responsiveness of output to changes in credit depth vary widely from district to district. Taking this into consideration, this paper provides a novel methodology for decision-making on optimal credit allocation towards districts. This could enable policy-making bodies such as RBI and NABARD to identify districts with excessive and deficient levels of credit depth and can also inform district-level interventions.

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