Credit and its expansion are the engines of economic growth. The need for credit can be best appreciated by imagining its absence. If investments are made only from savings, then business activities and economic growth will be significantly lower. Indian consumer spending will decline by more than 50 per cent, which is the average household debt to GDP. With lower demand, the prices of goods and services will be far lower.
If money cannot be lent to earn interest, there will be no incentive among people to save. When savings are not incentivised, people will not work more and, hence, will not earn more. Thus, the overall economic activity, growth and productivity will suffer. Therefore, credit and its expansion are critical for the economy and its growth. However, credit growth should go hand in hand with easy access of credit. The former indicates quantity and the latter the quality. In particular, productive sectors and purposes need easy access to credit.
The current total bank credit in India stands at Rs 219 trillion with about 16 per cent year-on-year growth, which is a healthy 60 per cent of GDP. In the last two decades, ease of credit has improved due to reforms in the banking sector and financial inclusion. However, public sources reveal more than 50 per cent of Indian adults do not have access to formal credit, that is, bank credit. Retail credit accounts for 35 per cent of total bank credit; if 50 per cent of it remains underserved, this implies that retail credit is concentrated and has higher risk.
With digital and speedy sanctions and disbursements, retail loans in India offer easy access to credit. Since retail loans are short-term, borrowers often cycle them within their family members or across multiple lenders, and are able to service their debt. This is reflected in the growth of retail loans, which was 10 per cent two decades ago, but has grown to about 35 per cent now.
On the other side, the corporate and investment loans, which were about 60 per cent two decades ago, have declined to 45 per cent now. Corporate and investment loans involve relatively longer credit processing time up to 6 months. They have more compliances and are prone to higher non-performing loans (NPAs). India’s investment credit is one-third of the total bank credit and only about 20 per cent of GDP.
The scenario is different in the other countries. In China, access to retail loans is not as easy as in India. Corporate lending is strong and higher. Housing loans show higher stress compared with other loans. Almost same is the case in Indonesia, where retail credit is moderate and corporate credit is strong. Vietnam used to be like China and Indonesia; but it underwent certain inter-segment structural changes, which includes increase in retail loans and higher corporate borrowing costs, leaving gaps for MSME lending. Brazil has a different pattern, with strong MSME lending and moderate retail lending but shows signs of household debt stress.
Investment credit is more than half of the total bank credit in China, about 40 per cent in Vietnam, 35 per cent in Indonesia and one-fourth in Brazil.
Retail credit is crucial for the smooth functioning of the regular economic transactions and to support consumption in the economy. The loan repayment capacity of consumers is dependent on the successful outcomes of investment credit, particularly growth in manufacturing and services. Therefore, investment credit is critical for increasing overall economic productivity, which in turn supports retail borrowers by generating higher income to repay their retail loans.
Quality credit, timely disbursal of productive borrowings and competitive credit are essential to enhance ‘ease of credit’. Balancing credit across sectors is not only about composition but also about productive requirement. Uneven, concentrated and unproductive credit may create a vicious loop.
Easy credit is as risky for the borrowers as it is for the lenders. Once borrowers slip into the unproductive credit loop, it becomes very difficult for them to escape. If funds lent to unproductive purposes get stuck or require recycling, lenders might face a shortage of funds to lend for productive purposes.
To avoid such risks, the ease of credit should ensure broad-based retail lending, while investment credit should also be extended with improved access and efficiency.
(Views expressed by author are personal)
