Chart of the Day: Banks must reclaim lost share of funding economy
India's banks could see their share in overall flow of funds to the economy increase for the second straight year in FY23
September 20, 2022 / 01:09 PM IST
India’s banks are no longer the dominant source of funds for the economy with their share in flow of funds falling ever since the pandemic. Non-bank sources such as capital markets, foreign sources and non-bank finance companies have led the financing of the commercial sector in both FY20 and FY21. However, banks seem to have gotten their mojo back with their share increasing in FY22 to 47 percent in the overall flow of funds to the commercial sector. The surge in bank credit growth this year is encouraging and banks are likely to bounce back as a dominant source of funds for the economy. As such, the total flow of funds this year is expected to show healthy growth unlike during the pandemic. One factor that could determine which resource borrowers go to for funds is the cost of borrowing. Both loan rates and market interest rates have been on an upward swing since the Reserve Bank of India began hiking policy rates this year. However, the transmission to market interest rates was initially faster compared with loan rates. Lending rates have begun to inch up while the rates in the bond market have cooled down somewhat. Non-bank lenders that can command cheaper funds from the bond market have been flocking to it.