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Key Points

A new report by Standard Chartered highlights that economic activity, not surplus liquidity, primarily drives credit growth. While surplus liquidity supports unsecured personal loans, broader credit demand remains tied to economic conditions. Historical data shows credit-to-GDP ratios often decline during high liquidity periods. Digital lending and easier access have fueled the rise in unsecured loans over the past decade.

Key Points: Economic Activity Drives Credit Growth More Than Liquidity Report Finds

  • Economic activity outweighs liquidity in credit growth
  • Unsecured loans rise with surplus liquidity
  • Credit-to-GDP ratio declines during high liquidity
  • Digital lending boosts unsecured loan expansion
2 min read

Credit growth influenced by economic activity rather than surplus liquidity: Report

Standard Chartered report reveals economic activity, not surplus liquidity, is the key driver of broad-based credit growth in the economy.

"Credit growth depends more on economic activity than the size of the liquidity surplus – Standard Chartered Report"

New Delhi, June 28

Credit growth in the economy is influenced more by overall economic activity than by the size of the liquidity surplus, according to a recent report by Standard Chartered, an international bank.

The report noted that while a high liquidity surplus may provide some support to unsecured personal loan growth (excluding consumer durable loans), it does not automatically lead to broad-based credit growth.

It stated, "Credit growth depends more on economic activity than the size of the liquidity surplus; however, unsecured personal loan growth (ex-consumer durables) could get a fillip on a large liquidity surplus".

In fact, as the report mentioned that the credit growth excluding unsecured personal and consumer durable loans tends to slow during periods of excess liquidity.

This trend suggested that the real demand for credit, which is closely linked to economic activity, is a more important driver than the availability or cost of funds.

"Slower economic activity triggers action by the central bank to increase the liquidity surplus as a counter-cyclical measure," the report said.

However, despite such efforts, overall credit (excluding unsecured personal and consumer durable loans) as a share of GDP has declined during past episodes of high liquidity surplus.

For example, the report highlighted that during the period from December 2016 to September 2017, when liquidity surplus ranged between 2.6 per cent and 3.3 per cent of Net Demand and Time Liabilities (NDTL), credit (excluding unsecured personal and consumer durable loans) as a percentage of GDP fell from 48.9 per cent to 46.2 per cent. This decline continued until mid-2019.

Interestingly, unsecured personal loan growth (excluding consumer durables) has shown a strong uptrend over the last decade. Its size more than doubled to around 6 per cent of GDP.

While this growth is largely driven by structural factors such as improved access to credit and the rise of digital lending, the report pointed out that its pace of expansion tends to increase during periods of high liquidity surplus.

During March 2021 to March 2023, as per data shared by the report amid a large liquidity surplus and relaxed credit conditions, the share of unsecured personal loans in GDP rose at a faster pace than during previous similar episodes.

- ANI

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Reader Comments

P
Priya S
The rise in unsecured personal loans is worrying though 😟 So many young people taking loans for lifestyle expenses. Banks should be more responsible in lending, not just chase profits during high liquidity periods.
A
Arjun K
As a small business owner, I can confirm this. Banks kept offering me loans last year but I didn't take because sales were slow. Now that demand is picking up, I'm considering credit options. It's all about business confidence!
S
Sarah B
Interesting data but the report could have analyzed regional variations. Credit growth in South India might behave differently than North India due to different economic activities. Would love to see more granular data.
V
Vikram M
Digital lending apps have made personal loans too easy to get. I know people taking loans just for vacations! RBI should tighten norms before this becomes another NPA crisis waiting to happen.
K
Kavya N
The correlation between economic activity and credit growth is strong, but what about inflation? During high inflation periods, even with good economic activity, real credit growth might be lower. Would be good to see that angle covered.

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