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Credit growth to surpass nominal GDP growth, unsecured credit not a worry: Report

October 20, 2023

Credit growth to surpass nominal GDP growth, unsecured credit not a worry: Report
In the latest findings by the ASCB covering the period from FY01 to FY10, it was revealed that bank credit grew at an average rate of 1.82 times the nominal GDP growth during a high-growth phase. However, this relationship faltered in FY11-20, dropping to 1 time due to banks grappling with severe asset quality issues after the 2008 global crisis. The trend worsened in the pandemic years of 2020-21 and FY22 due to a contracting GDP.

A recent State Bank of India report indicates a positive shift in this pattern for FY24, with the credit to nominal GDP ratio expected to be around 1.7 times, up from 1.2 times in FY23. This boost in credit is set to enhance funds flowing into the economy, sustaining momentum. The report suggests a prolonged period of growth if banking sector indicators persist as the new norm.

Notably, credit growth (YoY) at ASCB has been accelerating since early 2022, with a 20% rise in credit and 13.2% increase in aggregate deposits till September. Anticipated robust credit demand during the festive season is expected to further fuel this growth.

Moreover, the banking system’s asset/liabilities growth from FY14-23 is 1.3 times higher than the growth observed in the last 60 years, as highlighted by the SBI Ecowrap report. This growth has directly contributed to 1.4 times increase in Nominal GDP during the same period. The narrowing credit-to-GDP gap indicates improved credit demand, particularly in the manufacturing sector.

Importantly, there have been no significant shifts in retail loans composition, with both secured and unsecured retail credit growing steadily post-COVID-19. Secured retail loans, especially housing loans, constitute a significant portion of the retail portfolio, indicating lower risks. This positive trend, coupled with the preference for pre-payment in demand loans, provides lenders with confidence, ensuring stability in the banking sector.

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