IMPACT OF BANK CREDIT ON ECONOMIC GROWTH IN INDIA: AN EMPIRICAL STUDY

Author

Dr. B. Lakshmana Rao


Abstract

 Bank credit is an important channel through which financial resources are mobilised and transferred to households, businesses and productive sectors of the economy. In a bank-dominated financial system such as India, the availability and allocation of bank credit can influence investment, consumption, entrepreneurship and industrial activity, and consequently economic growth. This study empirically examines the relationship between bank credit and economic growth in India during the period 2000–2023. The study uses secondary annual data obtained from the World Bank's World Development Indicators. Domestic credit to the private sector provided by banks as a percentage of GDP is used as the proxy for bank credit, while annual GDP growth is used as the indicator of economic growth. Descriptive statistics, correlation analysis and simple ordinary least squares regression are employed. The results show that the bank-credit-to-GDP ratio declined substantially during the study period, while GDP growth remained comparatively strong but volatile. The correlation coefficient between the two variables is approximately 0.082, indicating a very weak positive association. The regression results show that the coefficient of bank credit is positive but statistically insignificant, with an R² of approximately 0.007. These results suggest that the contemporaneous level of bank credit relative to GDP, considered in isolation, does not adequately explain annual GDP growth. However, this finding should not be interpreted as evidence that bank credit is unimportant. Recent Reserve Bank of India analysis using a structural VAR framework for 2000–2023 finds that credit shocks have a positive effect on GDP growth. The study therefore concludes that the relationship between bank credit and economic growth is more complex than a simple contemporaneous correlation and depends on credit quality, allocation, financial conditions, investment demand and broader macroeconomic factors.



Keywords

Bank Credit, Economic Growth, Financial Development, Commercial Banks, Credit-GDP Ratio, India, Banking Sector.



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References


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