Making sense of rebound in credit disbursal

Credit growth to agriculture and allied activities in September remained robust at 13.4%, shows RBI data. Credit growth to industry accelerated to 12.6% in September 2022 from 1.7% a year ago. Interestingly, credit to large industry increased by 7.9% in September 2022, as against a contraction of 2.1% in September 2021, and that to micro and small industries accelerated to 27.1% from 13.1% in the same period. Services sector also witnessed a rise to 20% in September 2022 from 1.2% in September 2021. Credit growth in personal loans touched 19.6%, driven by home and vehicle loans.

What does the above trend indicate?

Credit support is the backbone of any economy. The slowdown in credit disbursal during the pandemic and the subsequent pick-up (See chart) show its correlation with economic activity. With credit growth outpacing deposit growth, credit-deposit ratio has been on the rise, touching 73.5% in June 2022 compared to 70.5% a year ago, signalling the revival in economic activity and higher investment levels. Credit growth in engineering, metal & metal products, chemical & chemical products will positively impact economic growth and also have a multiplier effect on other sectors.

What are some of the key lessons from the data?

With interest rates on the rise, cost of production is bound to increase, leading to cost-push inflation. However, the industry does not get deterred by rising input costs as long as the Marginal Efficiency of capital (MEC) is high. MEC is the expected rate of return on capital investment or capital asset, and is a key determinant of investment demand.

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What about the loan rates in India?

The pick-up in credit support comes despite the RBI’s tight monetary policy approach. The central bank has raised the repo rate by 1.9% i.e. from 4% in April 2021 to 5.9% in September 2022, leading to a rise in the Marginal Cost of Funds Based Lending Rate (MCLR). MCLR, a benchmark interest rate, is the minimum lending rate below which a bank is not allowed to lend. As of October 2022, MCLR for SBI on one-year and three-year loans have increased to 7.95% and 8.25% from 6.95% and 7.3% in May 2021.

Where is the RBI right by default?

Bank credit growth at 17.1% in October 2022 reflects high festive demand and the economy returning to growth. Fortunately, the RBI has left the reserve ratios untouched i.e. CRR at 4.5% and SLR at 18%. Also, the central bank has been facilitating credit accessibility, and the credit-deposit ratio has been rising. However, it is a matter of debate why borrowing costs should go up while credit support is being ensured.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH