The Indian banking industry witnessed a significant growth in credit in the February 24 fortnight, registering a substantial 15.5% year-over-year increase to reach Rs 134.5 trillion. This is an encouraging sign for the economy, which had been facing slowed growth due to the COVID-19 pandemic.
The growth was primarily driven by credit disbursal to priority sectors, such as agriculture, small businesses, and retail lending, which grew by 6%, 11%, and 10% respectively on a year-over-year basis.
In addition, credit to infrastructure, a key sector for economic development, grew by 9.8% year-over-year, indicating renewed confidence in the long-term prospects of the economy. This sector includes power, roads, telecommunications, and other vital infrastructure, which are critical for growth and development.
Moreover, the data released by the Reserve Bank of India (RBI) also revealed the overall credit deposit ratio increased to 77.6% in the fortnight ended February 24th, from 76.6% a year earlier. This indicates healthy lending activity and reflects the willingness of banks to push credit in order to boost economic activity.
The surge in credit and healthy lending activity is a positive sign for the economy that has been ravaged by the COVID-19 pandemic. The pandemic had led to a sharp contraction in economic activity in the first quarter of the financial year 2020-21, and the growth outlook for the year had been revised downwards.
The RBI had decreased the interest rates in order to spur economic activity, and the government had also announced various stimulus packages to reduce the impact of the pandemic. However, the growth was still weak in the post-pandemic economy.
This shift in credit growth represents a noteworthy trend given that there was a contraction in credit of 1.5% in the same period last year. However, the growth is largely due to the base effect, given the weak credit growth last year.
The report also highlighted that credit growth for personal loans has increased by 9.6% y-o-y, primarily driven by a demand for consumer durables and Home loans, which have seen a growth of 8.8% y-o-y. This indicates that there is renewed interest in retail lending, as consumers are beginning to seek financing options to purchase homes and durable goods. The expansion of personal loans could also signal that the economy is moving towards recovery, as individuals are more willing to spend and invest in the economy.
Despite the positive trend in credit growth, analysts have urged caution as banks are still grappling with high levels of non-performing assets (NPAs) in their books. The impact of the pandemic has remained significant, and there are concerns of rising cases and slow vaccination drives weighing on the economic recovery in the short term.
The RBI has also cautioned about the potential for a second wave of COVID-19 infections, which could dampen the current growth momentum. The central bank remains vigilant in its approach, closely monitoring the evolving situation and assessing the need for additional policy measures.
In conclusion, the growth in credit in the February 24 fortnight is a promising sign for the economy, indicating a return to growth and stability. The broad-based growth in credit to priority sectors, retail lending and infrastructure bodes well for the long-term prospects of the economy. However, the banks must continue to grapple with high levels of NPAs in their books and remain vigilant in their lending practices. With the focus on economic recovery and growth, it remains to be seen how the credit growth trend will play out in the coming months.