India’s bank credit-to-GDP improved to 58 per cent in 2020 from a low of 53.2 per cent in 2019. But it is the second lowest placed among all Asian peers, according to data released by the Bank of International Settlements (BIS) earlier this month. At 58 per cent, India’s bank credit-to-GDP ratio is at a 5-year high (56 per cent in 2015), yet it is just over half of what G20 economies clocked last year. It’s also much lower than emerging market economies and advanced economies, who punched in at 135.5 per cent and 88.7 per cent respectively.
A higher percentage indicates aggressive and active participation of the banking sector in economic activity, while a lower number implies there exists a scope, and need, for rapid formal credit growth. Which is why several experts, including former RBI deputy governor Viral Acharya, have been batting for privatisation of banks to increase credit growth.
With bank credit growth sliding to 5.6 per cent in FY21 and continuing at 5.5-6 per cent in FY22 so far, chances are that total credit-to-GDP may sink further in calendar year 2021. That said, India’s credit-to-GDP gap—which measures risks associated with lending to businesses and households over long-term periods—stood at a negative 5.7 per cent—among the lowest across Asian economies.
While this indicates its resilience, several Asian economies including Hong Kong, Japan, and Korea have alarming gaps at 28 per cent, 28 per cent and 18 per cent respectively. Such high gaps indicate trouble for the system and if history is any precedent, it’s such high levels that led to the 2008 sub-prime housing crisis in the US.
58% India’s Bank credit-to-GDP 2020
53.2% India’s Bank credit-to-GDP 2019
135.5% BC-to-GDP (Emerging)
88.7% BC-to-GDP (Advanced)