Credit is, without doubt, the real king of the financial system. It is credit that multiplies the reserve money into broader money, fueling economic growth. Without adequate credit flow, business expansion and overall growth can stagnate. For this reason, credit growth is one of the most vital indicators of an economy’s momentum — especially for a capital-scarce country like India.
The Structure of India’s Credit System
India’s total bank credit currently stands at ₹265 trillion, with 87.5% funded by deposits. The remainder comes from equity, borrowings from the Reserve Bank of India (RBI), and other sources.
Of the total deposits, current and savings account (CASA) deposits comprise 36%, a notable decline from over 50% in the previous decade. According to the latest RBI data, core demand deposits form 13% of the total, while time deposits make up the remaining 87%.
On the deployment side, 69% of total assets are lent as credit, 25% are invested in government and other securities, and 6% are held as other assets.
Where Does the Credit Flow?
The current composition of credit reflects India’s evolving growth story:
Agriculture: 12.5%
Industry: 21.4%
Services: 27.7%
Trade: 6.4%
Commercial Real Estate: 3%
NBFCs: 8.5%
Personal Loans: 33.4%
Priority Sector Lending (PSL)
Priority sector lending currently stands at 45%, 5% above the regulatory mandate of 40%. Within PSL:
Agriculture: 12.4%
MSME: 16.7%
Weaker Sections: 10%
Housing Loans: 5%
Other Sectors: 0.9%
Trends in Credit Growth
Historically, India’s credit growth has ranged between 13% and 20%. However, the current growth rate has slowed to around 8%. Personal loans, once accounting for about 28–30% of total credit, now stand higher at 33.4% — signaling increased household borrowing.
Housing loans, which form 16.7% of personal loans, have remained stable over the years. Interestingly, while housing loans under PSL dipped by 50 basis points in the past two years, they have shown signs of recovery in the recent quarter.
A Global Comparison
When compared globally, India’s credit composition aligns broadly with other major economies, albeit with some differences.
In countries like the US, UK, Brazil, Australia, Singapore, China, and Germany, personal loans account for only 12–18% of total credit, compared to India’s 30%. Lending to commercial real estate is about 5% higher in those markets. Agricultural and industrial loans together hold a similar proportion as in India.
Unique to India is the 1% of total credit reserved for food credit, a regulated segment used for food grain procurement. Moreover, India’s mandatory PSL requirement remains higher than in most economies. Another distinctive feature is that Indian NBFCs absorb about 8.5% of total banking credit, while their global counterparts primarily mobilize funds directly from capital markets.
In contrast, credit demand in the US is lower as businesses rely more on capital markets. China’s credit is heavily regulated, with state-owned banks dominating. Brazil experiences more volatile credit cycles, while Singapore’s credit base is largely corporate and trade-oriented.
Credit-to-GDP Ratio and Profitability
India’s credit-to-GDP ratio stands at 80% — moderate by international standards, suggesting room to expand by another 20 percentage points to better support growth.
Profitability in banking credit is measured through the Net Interest Margin (NIM). While countries such as Singapore, UK, Germany, Australia, and China report lower NIMs of around 2.5%, India, the US, and Brazil maintain higher margins near 3.5%.
On the asset quality front, India’s NPAs have improved significantly, declining from 9% five years ago to 2.5% today. However, the cost-to-income ratio remains elevated at 47%, indicating that nearly half of banks’ income goes into operating expenses.
The Road Ahead
India’s banking system has evolved to stand shoulder-to-shoulder with its global peers. Yet, to power the next phase of economic growth, the sector must:
Push the credit-to-GDP ratio higher;
Continue to reduce NPAs;
Lower the cost-to-income ratio; and
Expand branch and digital footprints to deepen financial inclusion.
Credit will remain the true king — the catalyst that transforms monetary reserves into productive capital and fuels India’s growth journey.
Disclaimer:
Dr. Kishore Nuthalapati is an Economist and Corporate Finance Professional. He currently serves as the CFO of BEKEM Infra Projects Pvt. Ltd., Hyderabad, India, and as the Regional Director (Hyderabad Chapter) of PRMIA, US, covering Telangana and Andhra Pradesh. The views expressed are personal and do not represent the opinions of any organization he is or was associated with.