What rising loan disbursals mean for the economy?

What is the News?

There has been a rise in lending by commercial banks in recent months. This has come after nearly two years of dismal banking operations due to the Covid-19 pandemic. 

According to RBI data, Bank credit growth for 2021 was at 9.2% as against 6.6% for 2020.

How does bank credit help the economy?

Economic Development: Increased lending by financial institutions enables prospective entrepreneurs to transform their talent into profitable commercial ventures. That is how India has seen the emergence of new generations of entrepreneurs. 

Empowerment of weaker sections: Bank credit is crucial in empowering the socially and economically weaker sections of society—such as empowering women entrepreneurs through ventures such as Sewa and Lijjat Papad.

What impacts bank credit disbursal?

There should be demand in the economy. Banks should be able to attract deposits, which in turn are given out as credit. However, deposits from the public depend on financial sector stability.

Monetary policy, specifically reserve ratios as prescribed by RBI also acts as a determining factor.

Why was there a slowdown in bank credit during the pandemic?

Demand declined as people conserved cash in the wake of the pandemic. Even though bank deposits saw a rising trend, demand and supply-side disruptions resulted in a sharp decline in credit growth. 

Why is there an increase in Bank Credit growth now?

There has been a rise in bank lending due to: ​​a) improvement in consumer and business confidence, b) increase in demand and c) the government placing its thrust on infrastructure spending and capacity expansion.

Source: This post is based on the article What rising loan disbursals mean for the economy?published in Livemint on 1st March 2022.

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