Economic Survey 2022-23: Credit growth likely to be brisk in FY24

If inflation declines in the upcoming fiscal and if real cost of credit does not rise, then credit growth is likely to be brisk in FY24, according to the Economic Survey 2022-23.

The increase in the overall bank credit has also been influenced by the shift in borrower's funding choices from volatile bond markets, where yields have increased, and external commercial borrowings, where interest and hedging costs have increased, towards banks, the survey says.

Growth in bank credit has kept pace with industrial growth, with a sequential surge evident since January 2022, it adds.

While a large share of bank credit continues to be assigned to large industries, credit to micro, small and medium enterprises (MSMEs) has also seen a significant increase in part assisted by the introduction of the Emergency Credit Line Guarantee Scheme (ECLGS), which supports around 1.2 crore businesses of which 95% are MSMEs, the Economic Survey says.

“The impact of ECLGS on increasing the growth of credit to MSME was felt most during the pandemic impacted years of 2020 and 2021. It continued in 2022 as the scheme was extended to March 2023. Furthermore, growth in credit to MSME was buttressed by rebounding consumption levels, particularly in the services sector. Consequently, the share of MSMEs in gross credit offtake to the industry rose from 17.7 per cent in January 2020 to 23.7 per cent in November 2022,” the survey notes.

While the growth in total credit has been driven by an increase in credit demanded by MSMEs, large industries have also begun to increase the pace of their credit offtake since the beginning of FY23.

“With the spread between corporate bond yields and marginal costs of funds-based lending rate (MCLR) narrowing, and the volatility in the corporate bond market remaining high, corporates appear to be shifting their sources of financing from bond markets to bank capital, where rates have remained stable and predictable,” says the Economic Survey 2022-23.

“Robust growth in credit demand combined with rising capacity utilisation and investment in manufacturing underscores businesses’ optimism regarding future demand,” it says.

All segments within the manufacturing sector except the textile industry witnessed growth in credit offtake in November 2022. While segments such as “Petroleum, coal products and nuclear fuels”, “Rubber, plastic and their products”, and “Engineering” have had a steady credit appetite, the improvement in growth of credit to the cement and construction sectors over the past year reflects the improved outlook of the construction sector, the survey adds.