Credit growth to sustain and spark virtuous cycle: Economic Survey

The robust growth in credit that has been experienced over several months is expected to sustain, and along with a rise in private capital expenditure, will bring in a virtuous investment cycle, the Economic Survey for 2022-23 has said.

“The credit upcycle will also be aided by constant monitoring of the risks in the financial system by the regulators and their efforts to contain them,” the Survey said, adding that the Reserve Bank of India’s support for growth would ensure sufficient liquidity in financial markets.

The rebound in economic activity in the previous fiscal year following the Covid-19 crisis and a greater degree of financial soundness among banks and corporates had boosted the expansion of credit since June 2021, the Survey said.

The year-on-year (YoY) growth in non-food bank credit sped up to 15.3 per cent in December 2022, with the credit growth broad-based across sectors, the Survey said.

The observations in the Survey come at a time when credit growth has sustained well above growth in deposits, exerting pressure on banks to mobilise funds. As on January 13, credit growth was at 16.5 per cent YoY while deposit growth was at 10.6 per cent.

“The well-capitalised banking system with a low NPA ratio and more robust corporate sector fundamentals will continue to enhance the flow of bank credit into productive investment opportunities, notwithstanding the rising interest rates,” the Survey read.

While the incremental credit-deposit ratio for banks rose sharply, clocking in at 122 per cent YoY on an annual basis, the accumulation of deposits over the past few years has given banks the ability to fund demand for loans, the Survey said.

With the RBI having implemented several banking reforms over the past decade, banks’ asset quality has improved, with gross NPA ratio falling to a seven-year low of 5 per cent in September 2022.

“Going ahead, as per the baseline scenario of the RBI’s stress testing framework, the declining tendency in the GNPA ratio is likely to continue and is projected to drop further to 4.9 per cent in March 2023,” the Survey read.

The loan growth has been primarily driven by retail credit and demand for home loans, the government said. An increase in demand for housing leads to greater investment, sparking a virtuous cycle, the government said.

“Credit to agriculture and allied activities gained momentum supported by the government’s concessional institutional credit,” the Survey read.