Credit growth in the economy is influenced more by overall economic activity than by the size of the liquidity surplus, according to a recent report by international bank Standard Chartered.The report said that while a high liquidity surplus may support growth in unsecured personal loans (excluding consumer durable loans), it does not necessarily lead to broad-based credit expansion. “Credit growth depends more on economic activity than the size of the liquidity surplus; however, unsecured personal loan growth (ex-consumer durables) could get a fillip on a large liquidity surplus,” reported ANI quoting the report.It noted that credit growth, excluding unsecured personal and consumer durable loans, tends to slow down during times of excess liquidity. This points to real credit demand, which is closely tied to economic activity, being a stronger driver than the availability or cost of funds.The central banks often respond to slowing economic activity by increasing liquidity as a counter-cyclical measure. However, even with such efforts, overall credit (excluding unsecured personal and consumer durable loans) as a share of GDP has historically declined during times of high liquidity surplus.Citing one example, the report said that between December 2016 and September 2017, when 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 share of GDP fell from 48.9% to 46.2%. This downward trend continued until mid-2019.In contrast, unsecured personal loans (excluding consumer durables) have shown a strong upward trend over the past decade, with their share in GDP more than doubling to around 6%. This growth is driven by structural factors such as greater credit access and the rise of digital lending. However, the pace of expansion in this segment tends to pick up during periods of high liquidity.For instance, during March 2021 to March 2023, when liquidity conditions were relaxed, the share of unsecured personal loans in GDP rose faster than in previous similar periods, the report highlighted.
