Vault matters | Thinning bank credit growth needs RBI’s immediate attention

The exuberant disbursement of unsecured loans has reduced, and so has overall bank lending growth.

There has been much said and written about how the new RBI governor, Sanjay Malhotra, should focus on reviving the country's GDP growth and also be vigilant about inflation. But what about bank credit?

Decline in Bank Credit Growth

At 11.46 percent year-on-year bank credit growth for the fortnight ending December 13, 2024, this number warrants attention. While it is moderately better than the previous fortnight’s loan growth data of 10.6 percent year-on-year, these numbers have significantly fallen from a year-ago growth level of 18-20 percent. This should be a cause for concern for the RBI, and here’s why.

It is widely accepted that the banking industry is a derivative or, sometimes, even a proxy for a country’s GDP growth. However, GDP growth, which is dependent on many factors such as capital formation and investments, is also influenced by the consumption patterns of people. Consumption and credit have a direct correlation. When consumption increases, credit increases, and money supply also increases.

When credit growth falls significantly from a year-ago level, all these factors tend to appear depressed. But who is responsible for this?

RBI’s Regulatory Actions

Last November, the RBI increased risk weights on unsecured loans and loans extended to non-banking financial companies (NBFCs). Both unsecured loans and NBFC lending play a vital role in boosting consumption. However, the problem was that, for a good part of three years until 2023, loans for unsecured products such as personal loans and credit cards, as well as bank lending to NBFCs, were the major catalysts for overall credit growth. Whether there was an imminent credit bubble brewing or not remains an open question, but in November 2023, when the RBI decided to increase the risk weights on loans to these two segments, it seemed justifiable.

A year later, the impact of this regulatory action is being felt in the system. The exuberant disbursement of unsecured loans has reduced, and so has overall bank lending growth. While the intent here is not to suggest that the regulator should once again open the tap on unsecured loan products, we do need to find ways to promote healthy credit growth. Banks also need to find innovative ways to offer personal loans and credit cards without making the products too risky. It is time they also approach this segment with a genuine interest in growing their loan books, rather than focusing on these products to boost profitability—greed, which led banks to the situation they are in now.

Solutions to Revive Bank Credit

The last word, however, would be that of the regulator. If banks are willing to take a step forward to promote loan growth, can the regulator assure them of a conducive regulatory framework where they won’t have to hold back on ideation and execution?

Given the recent actions taken by the RBI over the past year, some assurances from the regulator could go a long way in reviving bank credit growth.