Editorial✍ Prelims cum Mains

Credit growth doesn’t reflect the health of the banking system

Slowdown in credit growth during the recent years:

  • A few years earlier, the RBI started to clean up bank balance sheets.
  • It pushed for recognition of bad assets and put weak banks under the prompt corrective action (PCA) framework.
  • This resulted in a sharp slowdown in bank credit growth.


Recent RBI policies have led to credit growth last year:

  • Recent months have seen a reversal in the RBI’s policies.
  • Many banks have been taken out of the PCA framework.
  • In addition, interest rates have been cut.
  • As a consequence, the total bank credit grew by 12.2% in the financial year 2018-2019.
  • The total credit to industry grew by 6.9%.


Latest data shows growth in bank credit:

  • The data released by the Reserve Bank of India (RBI) at the end of April shows a pick up in bank credit, led by credit growth of large companies.
  • This improvement seems to be mainly on account of higher credit disbursal by the State Bank of India (SBI).
  • The credit to infrastructure grew at 18.5%.
  • But credit to small firms fell:
    • However, in the credit to industry, the already minute share of small firms fell further.
  • Large firms have predominant share in bank credit:
    • In industry, large firms have the highest share of the bank credit, relative to medium or small and micro firms.
    • The growth of credit to industry was driven by large firms at 8.2%.
    • The credit to small and micro firms grew by less than 1%.


Huge bank credit growth in infrastructure:

  • The sectoral composition of the bank credit growth shows a sharp increase in credit to infrastructure which grew at 18.5% in the year.
  • The numbers show the continued dependence of infrastructure on banks.

This is risky for banks:

  • There is an asset liability mismatch in bank lending to infrastructure, as bank deposits are short term while lending to infrastructure is long term.
  • Thus, an increased lending to infrastructure increases risk in banks.


Data shows banking sector still not healthy:

  • While banks under the PCA framework continue to be weak, even those outside it are not very healthy (with the exception of SBI).
  • Recently the RBI has moved many banks such as the Bank of India, the Allahabad Bank, the Corporation Bank and others out of the PCA. However, these banks continue to slip on credit growth.
  • Even among the “healthy” banks, the Punjab National Bank shows negative credit growth and 16.3% of assets as gross NPAs.
  • The Canara Bank shows positive growth, but this growth rate declined from September to December 2018.
  • The SBI is the only bank for which capital adequacy ratio, gross NPA and credit growth have all shown an improvement.

Meaning credit growth not from improving banking system:

  • In other words, the growth of credit does not seem to be coming from a general improvement in the health of the banking system.


Lack of reforms in banking sector:

  • The overall picture emerging from the latest data on bank credit highlights the lack of fundamental reform in the banking sector.
  • Small and medium enterprises remain deprived of credit.
  • The lack of a bond market encourages both large corporate and infrastructure companies to borrow from banks.



  • Small temporary fixes, as have been done in recent months by the RBI, might give some increase in credit growth, but the fundamental weaknesses in the financial system will remain unaddressed.
  • The need of the hour is long term financial sector reform to build a bond market and a competitive banking system.



GS Paper III: Indian Economy

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