Credit Distribution Data: What Do They Show?
With the Indian economy back on its growth trajectory, the credit disbursement numbers are on the rise again. The Reserve Bank of India’s annual report for 2021-22 shows that credit disbursement by scheduled commercial banks gained momentum in FY22. Bank credit grew by 9.6% in FY12 as against 5.6% in FY2011. The trend only seems to be improving with gross bank credit in April 2022 growing at 11.1% against 4.7% in April 2021. Non-food credit growth has turned the corner – at 11.3% in April 2022 as against 4.7% in April – and credit offtake has been mostly positive since August 2021.
Sector-wise, what is the trend of credit disbursements?
While agriculture and allied activities have kept pace, the growth of credit to industry has picked up. It contracted last year as a result of the pandemic and low consumption demand. Credit to medium enterprises and retail loans have grown rapidly. The revival in credit delivery to capital-intensive sectors such as infrastructure bodes well for the economy as it will spur economic growth and have a multiplier effect on other sectors. Credit growth to the services sector has also picked up, indicating an uptick by the contact-intensive sectors (though still below pre-pandemic levels).
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What about credit-deposit ratio?
With CRR at 4% (which was recently raised to 4.5%) and SLR at 18%, banks were able to lend 78% of their net time and demand deposits. But the credit-deposit ratio for FY12 stood at 72.2%, with room for improvement. Also not to be missed is that with the economy reviving, overall deposit growth for FY12 is down at 8.9% as against 11.4% in FY2011.
What is the explanation for increase in credit disbursement?
Manufacturing activity improved in FY22, with capacity utilization in manufacturing reaching 72.4% in Q3 from 68.3% in Q2. The overall increase in business activity has fueled industry-wide credit growth. Further, the latest Central Statistics Office data shows gross fixed capital formation at 32.5% of GDP in FY12, as against 30.5% in FY2011, reflecting a revival in investment demand. With the increase in credit disbursement for medium enterprises and personal loans, the economic indicators on the demand side are also increasing.
What can affect credit growth?
Rising inflation prompted the Reserve Bank of India to raise key policy rates. This led to higher interest rates and higher production costs, which reduced the margins of the industry. However, with consumption demand still normalizing, the industry cannot pass on the rising costs. Also, supply chain disruptions due to external developments such as the Russia-Ukraine war and the lockdown in China are likely to worsen the situation.
Jagdish Shettigar and Pooja Mishra are faculty members at BIMTECH.