Despite gradual credit growth that plunged to a 59-year low at 5.56 percent in FY21, the bank credit-to-GDP ratio hit a five-year high of just over 56 percent. cent in 2020, but far behind its peers and barely half the G20 average, according to the latest data from the Bank for International Settlements (BIS).
With a credit-to-GDP ratio of 56.075%, the country’s total outstanding bank loans stood at $ 1.52 trillion in 2020, according to BIS data for the year, but it is still second lowest among all its Asian peers. And for emerging market peers, it’s 135.5% and 88.7% in advanced economies.
It can be noted that despite the massive credit-focused stimulus the government tried to push to help alleviate the impact of the pandemic in 2020, gradual credit growth only increased by 5.56 % (at Rs 109.51 lakh crore), which was the lowest growth recorded in 59 years while in fiscal 1962 it was 5.38 percent.
Even in FY20, credit growth was at its lowest level in 58 years at 6.14%, an analysis from SBI Research recently showed. Bank credit growth is a key indicator of economic growth, analysts say, and a 100 percent credit-to-GDP ratio is ideal, indicating robust credit demand without fear of a bubble forming.
A higher credit-to-GDP ratio indicates an aggressive and active participation of the banking sector in the real economy, while a lower number indicates the need for more formal credit. It is also a major reason why economists and analysts are calling for the privatization of public banks to increase credit growth.
At 56%, the country’s bank credit-to-GDP ratio is at its highest level in five years from 64.8% in 2015, but it is just over half of what the savings of the G20 recorded last year. In contrast, the ratio for the other four BRICS members was as follows: China-161.75 percent, Russia-88.12 percent, Brazil-50.8 percent and South Africa at a low 40.1 percent. hundred.
The country’s credit-to-GDP ratio improved to 56.075% in 2020, from a low of 52.7% in 2019. In 2018, it was still below 52.4%, slightly better at 53.6% in 2017, and highest at 59% in 2016 and best over five years of 64.8% in 2015.
According to BIS data at 56 percent, the ratio is just over half of what the G20 economies recorded during the year. It is also much lower than that of emerging market economies and advanced economies, which grew by 135.5% and 88.7% respectively.
What is more worrying is that all the liquidity surge by the Reserve Bank is unlikely to have a tangible impact on the rise in credit demand this year as well, because so far this fiscal growth Additional credit has tended to 5.5-6%, indicating that the ratio may decline further in 2021.
On the positive side, the low credit-to-GDP ratio has caused the credit-to-GDP gap, which is a measure of the risks associated with increasing lending to businesses and households over the long term, to be minus 5.7 %. , which is among the weakest in Asia.
A lower credit-to-GDP gap indicates the resilience or ability of the economy to repay its debt, several Asian economies such as Japan, Korea and Hong Kong have alarming gaps at 28%, 28% and 18%, respectively . Higher spreads show problems for the financial system, as evidenced by the 2008 subprime housing crisis in the United States.
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