The ASCB data for the period FY01 to FY10 indicates that bank credit grew at an average of 1.82 times of nominal GDP growth, during a period of high growth. During FY11-20, the relationship broke down, and growth declined to 1 time largely, mostly because of the severe asset quality issues of banks post the 2008 global crisis. The relationship broke down during the pandemic years of 2020-21 and FY22 as GDP contracted.
In FY24, credit to nominal GDP ratio may end up being around 1.7 times, up from 1.2 times in FY23, boosting the flow of funds to the broader economy, helping sustain the momentum, revealed a recent report by the State Bank of India.
“If the banking sector’s indicators are taken as a new normal, we are in for a sustained period of growth,” it further said.
ASCB’s credit growth (YoY) has been accelerating since early 2022. Aggregate deposits grew by 13.2 per cent and credit by 20 per cent till September. In the coming months, the credit demand is expected to remain robust due to the festive season.
The total asset/liabilities growth of the banking system during FY14-23 is 1.3 times higher than the growth in the last 60 years, the SBI Ecowrap report highlighted.
As banking sector growth leads to GDP growth, the Nominal GDP also increased by 1.4 times higher during FY14-23.
The credit-to-GDP gap narrowed, reflecting the improved credit demand in the economy in the face of rising capacity utilisation in the manufacturing sector, the report further added.
Unsecured credit not a major worry
There has been no major compositional shifts in retail loans. Both secured and unsecured retail credit has grown since COVID-19.
The share of secured retail credit significantly dominates total retail loans. Secured loans are mostly long term and unsecured loans are mostly demand loans. The total share of unsecured retail loans is minimal at 10 per cent, which indicates contained risk, said the report.
Lenders could also draw comfort from the fact that secured loans are mostly long term (housing loans constitutes nearly half of the retail portfolio) while unsecured loans are mostly demand loans that have lower comparative presence on lenders’ balance sheet while higher RoI also nudges borrowers to opt for pre-payment in many cases.
