What do the bank credit growth figures tell us?


Bank lending grew at double-digit rates in 2022-23. In September, non-food credit growth crossed 15% year-on-year for the first time since 2018. This is good news, as bank credit is often a leading indicator of growth. Companies use bank loans to finance their working capital as well as new investments. Households borrow to finance housing, education, consumer durables, vehicles and other personal expenses. Non-bank financial corporations (NBFCs) borrow from banks to lend to their customers. Thus, a sustained increase in bank credit generally signals an economic recovery.

Since 2000, India has had three periods where real economic growth exceeded 7% for a continuous period. Each phase was preceded, and sometimes accompanied, by a credit surge. Indeed, bank credit continues to play an important role in financing economic activity, despite the rise of alternatives such as non-banking companies and foreign loans. Bank financing constituted 47.5% of the total flow of resources to the commercial sector in 2021-22.

The credit impulse, a more nuanced measure, has also picked up after a long negative stint during the pandemic. Measured as the change in the flow of bank credit as a percentage of GDP, the credit impulse is better able to predict recoveries after a downturn. For example, in the early stages of a recovery, the rate of credit growth may be low, but if new credit is increasing at an increasing rate, it may provide a “push” to investment demand. The credit impulse has been positive for four quarters now, giving hope for a recovery in investment.

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Credit impulse

Industrial credit

Two developments threaten this optimism. First, credit to industry. Admittedly, a slight increase has been observed this year, but this could be due to several factors that may not really convert into investments. In reality, the sluggish growth of the last decade means that the industry’s share of total bank credit has fallen sharply, from 45.7% in March 2013 to 25.7% in August 2022.

This year’s growth was driven by high fuel and raw material costs, which may have led to additional financing needs. Some bank loans may have replaced more expensive foreign debt. Interest rate hikes probably made borrowing from banks less expensive than in bond markets. (The minimum cost of fund-based lending rates is relatively cheaper than rates based on external benchmarks.) All of this suggests that the recovery in industrial credit may be a response to current conditions, rather than a sign of spending. higher investment.

Deposit shift

The second threat is the growth of deposits. Banks rely primarily on deposits from the public to fund their loans. Since April, as credit growth has surged, deposits have grown at a steady 9-10% rate. This mismatch has created a funding gap. Banks will need to mobilize more deposits or raise funds from other sources to alleviate this resource constraint.

Recently, several banks have announced higher deposit rates to attract more savings. However, given the large deposit gap, banks will likely need to raise additional funds through other instruments such as certificates of deposits (CDs) or bonds. Unfortunately, even though Indian households prefer to keep most of their savings in bank deposits, they may not be able to bridge the gap between deposits and credit. Indeed, household savings are under pressure from inflation, while their consumption increases due to pent-up pandemic demand. If banks are unable to obtain more resources, they will face constraints to credit growth.

Greater risks

By far the greatest concern for banks is the deterioration of the economic scenario, which threatens both the growth of investments and that of consumption. The International Monetary Fund predicts a one-third contraction of the global economy by next year and slower growth in the United States, Europe and China. A global slowdown of this magnitude would hurt Indian exports and outward-looking service sectors. In the domestic manufacturing sector, capacity utilization remains well below the 80% level that typically requires new investment.

The current environment of high inflation and high interest rates is not conducive to bank lending. Households avoid loans when prices are high or rates rise. Businesses may also become cautious as the holiday rush slows. In other words, the increase in bank credit, although welcome, does not guarantee a real recovery in demand. This would require an increase in real income, which in turn would stimulate a sustained increase in savings, consumption and investment.

Deepa Vasudevan is a freelance economics and finance writer.

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