Credit growth hit as economy slows down: McKinsey study

Credit growth has been affected in the past three years in line with the dampening economic sentiment.

From the year 2011 to 2014, loans-to-GDP ratio has fallen by about three per cent after showing an increase of 62 per cent in the preceding seven years, beginning 2004, according to a study compiled by consulting firm McKinsey at the behest of Department of Financial Services.

In the last three years, the gross domestic product growth has tapered to about 5 per cent in 2013-14 from 8.4 per cent recorded in 2010-11.

In this period, loans to GDP ratio fell to 0.54 in 2014 from 0.55 in 2011, representing a three per cent fall. In the preceding seven year period, after UPA – I took over in 2004, this ratio improved from 0.33 to 0.55 till 2011. This issue was presented to top public sector bankers at the two-day retreat in Pune last week.

As the economic growth started tapering and banks started to get saddled with more non-performing assets, they lost the propensity to lend more.

This is reflected in the credit growth data, which fell from 20 per cent growth rate per cent in 2011 to 16 per cent in 2014. However, one particular metric — the number of financially excluded households — that did not show any improvement in the first seven years since 2004, started to get better since 2011.

Financially excluded households are households where no member of the household owns a bank account.

The percentage of financially excluded households, which was constant at 41 per cent in the years 2004 and 2011, improved to 35 per cent in 2014 mainly due to the large number of accounts opened in the last two years of the previous government.

According to Department of Financial Services (DFS) secretary, Hasmukh Adhia, this figure has further improved due to the ongoing Jan-Dhan scheme of the present government.

The DFS has claimed that over 98 per cent of the households (at least one person in the household) in the country now have bank accounts.

It is another matter that over 75 per cent of the newly opened accounts are not operational yet, going by the government’s own data.

If indeed 98 per cent of the households just own a bank account to begin with, this is a good first step. For actual transactions to happen, there has to be more awareness and direct benefits transfers will play a major role.