New Delhi ∙ Credit growth in the Indian economy is more closely aligned with overall economic activity than the size of the liquidity surplus, according to a recent report by Standard Chartered, a leading international bank.
The report observed that while a high liquidity surplus may provide marginal support to unsecured personal loan growth (excluding consumer durable loans), it does not necessarily translate into broad-based credit expansion.
“Credit growth depends more on economic activity than on the liquidity surplus,” the report noted. “However, unsecured personal loans (ex-consumer durables) could benefit from a large liquidity surplus.”
In fact, the report pointed out that credit growth—excluding unsecured personal and consumer durable loans—tends to decelerate during periods of excess liquidity, indicating that real demand, closely tied to economic fundamentals, is a more critical driver of credit expansion than mere fund availability or cost.
The report also explained that during times of sluggish economic activity, central banks typically resort to increasing liquidity surplus as a counter-cyclical measure. However, even such steps have historically failed to reverse broader credit deceleration.
Historical Trend: High Liquidity, Lower Credit-to-GDP Ratio
During the period from December 2016 to September 2017, for instance, when the liquidity surplus ranged between 2.6% and 3.3% of Net Demand and Time Liabilities (NDTL), credit (excluding unsecured personal and consumer durable loans) as a percentage of GDP declined from 48.9% to 46.2%. This downward trend continued until mid-2019.
Unsecured Personal Loans on the Rise
Conversely, unsecured personal loan growth (excluding consumer durables) has seen a strong upward trend over the past decade, more than doubling to nearly 6% of GDP. The report attributed this growth to structural factors, including greater access to credit and the emergence of digital lending platforms.
Yet, it also noted that the pace of this growth accelerates during periods of high liquidity surplus.
Between March 2021 and March 2023, amid a significant liquidity surplus and relaxed credit conditions, the share of unsecured personal loans in GDP rose more rapidly than in previous similar periods.
