Credit growth below Asia & EMEs, banks have room to expand: RBI

Mumbai: India has, theoretically, headroom for credit growth to support economic expansion, a central bank report said, which compared the country's total debt to gross domestic product (GDP) metric with the ratios for both advanced and emerging markets to arrive at what it described as an 'optimal' threshold.

"India's total credit-to-GDP ratio (including credit extended by banks as well as NBFCs) at 90.1% in 2022 was below that of AEs and emerging market economies (EMEs) as well as the estimated threshold (of 113.1%)," said a note published Thursday in the latest report on Trends and Progress in Banking.

"As such, higher credit growth remains supportive of economic growth," said the report.

The central bank economists estimate a credit threshold of 113.1% of the GDP is an optimal level for credit growth to support economic expansion before higher credit gets diverted for less productive purposes. To be sure, the thresholds could differ from one country to another, said the report.

The research looked into a sample of 16 emerging and advanced economies, and the macro data of the past 21 years were studied.

"Expansion of credit-to-GDP ratio beyond the threshold hampers economic growth," the note said.

Credit deepening can contribute to higher consumption, investment and economic activity in the economy. However, there could be an inverted U-pattern in the impact of credit on economic growth: Beyond a threshold, credit could be deployed in less productive or more risky activities and dampen growth, said the study.

Significantly, credit growth has been trending below 15% for more than three years now. Banks' loan book continues to be driven by the retail sector. Lending to the private corporate sector, which accounts for nearly a quarter of the total bank credit, decelerated during the second quarter of the current fiscal from the high growth registered in the previous quarter.