The banking sector’s credit growth is a key gauge of whether the economy is on the path of sustained growth. To that extent, the recovery in credit growth to double digits from worrying single digit for more than two years is a relief.
At the same time, a look at the credit-to-deposit ratio shows that there is still a long way to go for loan growth to reach levels that reflect a thriving economy.
The ratio indicates how much of the deposits are converted into credit by banks and what percentage is put into government bonds and securities.
The higher the ratio, the better is the pickup in credit growth. After falling sharply during the pandemic year of FY21, the ratio hasn’t recovered much.
The yearly ratio is at a level last seen in the aftermath of the 2008 financial crisis. Even as of end-May, the ratio hasn’t risen much above this level.
That said, the incremental credit-to-deposit ratio stood at 93.17 percent as of June 3, according to data from Reserve Bank of India (RBI). This is encouraging as it shows banks have begun to see more credit offtake this year.In other words, businesses are taking on more credit to keep their factories humming and Indians are willing to borrow more for consumption. If the trend continues, a credit-to-deposit ratio of above 73 percent would mean that India’s economy is on the path of sustained growth.