How does credit disbursal boost the economy?

Wed Feb 2, 2022

There’s been a rise in lending by commercial banks in recent months. This has come after nearly two years of dismal banking operations due to the covid-19 pandemic. Now attempts have been made to gather and analyse lending data.

What do the recent numbers show?

With the Indian economy showing signs of economic revival, credit growth for 2021 (calendar year) was at 9.2% as against 6.6% for 2020. It was at 6.7% in the December quarter of the current fiscal year as against 3.2% in the year-ago period. And in mid-February 2022, bank lending to the commercial sector was at 7.9% as against 6.2% a year ago. Loan demand revival is now seen across all sectors. Bank credit growth was at 13.4% in FY19, but was on a decelerating trend and was 6% in FY20. The pandemic sharpened the decline, resulting in credit growth falling to 5.4% during the health crisis.

What does sectoral data show?

Non-food credit growth for 2021 was at 9.3% as against 6.6% for 2020. While the positive trend in lending growth for agriculture and allied activities continues, industry also saw a growth of 7.6% in 2021 as against 0.4% in the previous year. A sharper growth trend is being witnessed in MSME (micro, small, and medium enterprises) and retail (especially consumer durables) loans. Services too are seeing an increase in bank credit growth. However, the aviation sector is still the exception. For large enterprises, bank credit growth saw a decelerating trend in 2020. But it seems to have turned the corner in 2021 and was at 1.3%.

What led to slower lending during the pandemic?

Demand declined as people conserved cash in the wake of the pandemic. Even though bank deposits saw a rising trend, demand and supply-side disruptions resulted in a sharp decline in credit growth. It was muted for the entire pandemic period, indicative of the pandemic scarring aggregate demand and resulting in banks turning risk averse.

How does bank credit help the economy?

Access to credit is crucial for economic development. Increased lending by financial institutions enables prospective entrepreneurs to transform their talent into profitable commercial ventures. That is how India has seen the emergence of many new generations of entrepreneurs. Bank credit is also crucial in empowering the socially and economically weaker sections of society—such as empowering women entrepreneurs through ventures such as Sewa and Lijjat Papad.

What impacts credit disbursal?

There should be demand in the economy. Banks should be able to attract deposits which in turn are given out as credit. Deposits from the public depend on financial sector stability. Monetary policy, specifically, reserve ratios as prescribed by the central bank, acts as a determining factor. Depending on the state of economy, the central bank decides how much money supply is to be made available. Variation in money supply impacts lending rates.

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