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Link between bank credit and economic growth weakening: SS Mundra

Raising concerns over the weak credit growth, Reserve Bank of India (RBI) Deputy Governor S S Mundra has said that the correlation between economic growth and banks' credit expansion is becoming weak due to proliferation of other institutions, and lenders will have to make a slew of changes to recover their share. Banks recorded a multi-decade low in credit growth last fiscal, not even breaking into double digits, while the GDP rose 7.6 percent.

RBI deputy governor further said that the relationship has weakened over years as banks have started accommodating companies through other sources like commercial paper (CP) and bonds.  He added that share of non-bank sources like NBFCs, housing finance companies and CPs has increased to 38.6 percent in March 2016 as compared to  35.2 percent in March 2014. The total credit distributed by the non-bank entities has increased to 37.40 percent in these two years, which is twice the pace of the 19.22 percent growth reported by banks. 

He said that a stable multiplier of real economic growth and bank credit may emerge only in the medium term, once the banks overcome a slew of weaknesses such as asset quality stress, revival in private sector investments and when inflation starts trending lower, which will lead to lower lending rates and push loan demand. Though, Mundra also added that banks will continue to remain the mainstay of finance for the economy.

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