After seeing more than 10% growth for the first three months of this year, bank credit growth slipped back to single digits (9.2%) in April and has remained so in May.
The rise in the initial months fanned hopes that an economic recovery was in the offing, but recent data indicates that demand continues to remain sluggish.
Lack of demand in the system is what has led to the bank credit growth becoming static. According to State Bank of India’s chief economist Soumya Kanti Ghosh, there is unlikely to be a material change in bank credit growth unless demand picks up. Not sounding too gung-ho about the way ahead, he said, “Economic growth has to happen before credit growth.”
Ghosh also emphasized that banks have to reduce stressed assets for credit growth to recover significantly.
The Indian banking system has been plagued by the problem of bad loans and central bank governor Raghuram Rajan has set a deadline of 31 March 2017 for banks to clean up their books.
“Given that the banks are undertaking the exercise of cleaning their balance sheets, one is unlikely to see any significant change. Going ahead, a marginal uptick or downtick can be expected but it won’t be a major movement,” added Ghosh.
Economists point out that bank credit growth is usually a lagging indicator since the initial expansion of working capital from the bottom of a cycle is from a company’s own resources. Only later do they turn to banks for funding. Even so, the fact that bank credit growth is slipping once again is not a good sign for the economy.