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Surge in retail loans fuels economic boom

India's bank credit to GDP ratio has been increasing by leaps and bounds in recent years. As the table shows, bank credit (all scheduled commercial banks) as a percentage of GDP has gone up from 25.1 per cent in 1999-2000 to 38.4 per cent in 2004-05. Also, if we take the government's advance estimates of GDP at factor cost at current prices for this fiscal, i.e. for 2005-06, and consider the present rate of growth of bank deposits, the bank credit to GDP percentage for this year is likely to be around 45 per cent. In six years, bank credit to GDP has gone up by as much as 20 percentage points. If we were to add up credit extended by NBFCs, credit card debt and loans from financial institutions and housing agencies other than banks and also add credit taken from the co-operative banking system, the proportion of credit to GDP will show an even higher rise.

Does this mean that the growth in GDP has been fuelled by ever-increasing debt' At first glance, that doesn't appear so, because it's entirely normal that credit levels go up during a boom. As a matter of fact, the macro data show that the savings rate has gone up to 29 per cent of GDP, although that seems to be the result of lower government dissaving. It makes sense, therefore, to compare the bank credit/GDP ratio for previous boom periods. Perhaps a comparable year would be 1996-97, when GDP (in real terms) grew by 7.5 per cent and which was the third consecutive year in which the economy had notched up more than 7 per cent growth.

So what does the data show' Taking CMIE data, credit outstanding of all scheduled commercial banks was 22.5 per cent of GDP at factor cost (current prices) in 1996-97. It was slightly better in 1995-96 at 23.8 per cent. That's not too much higher than the 21.2 per cent reached in 1993-94.

In other words, the level of credit offtake during the current boom is far higher than during the boom in the mid-nineties. That's not surprising, considering that there was hardly any retail credit in the nineties. To be sure, retail lending in 2004-05 (including housing loans, personal loans and loans for consumer durables) amounted to only 6.1 per cent of GDP. But it's obviously a much larger proportion of incremental lending ' the RBI's recent review of monetary policy mentioned that retail lending accounted for a third of incremental non-food credit this fiscal. Clearly, debt has played a much larger part in the current economic boom.

Still, we're still way below most other countries in terms of retail lending as a proportion of GDP. That would imply debt-fuelled consumption will continue to play a large role in boosting GDP. However, with rising imports, it's the current account deficit that could be cause for worry.

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