Much more private credit would be required for fast GDP growth

We must develop these sources because banks alone can’t fulfil India’s fast-growing credit appetite

India’s growth engines continue to power ahead, fuelled by government capital expenditure-led growth and strong services exports. India has the potential to become a $7 trillion economy by 2030. However, enhancing the capacity of private sector credit markets in India will be an important component of fulfilling this potential.

India’s credit market is not just restricted to bank lending. Non-bank sources are significant players in the overall credit ecosystem. Total private sector credit (TPSC)—a broader credit measure we use for the economy that includes non-banking financial companies (NBFCs), corporate bonds and external commercial borrowings (ECBs)—has grown around five times in the last 13 years to around ₹210 trillion by fiscal year 2022-23 at a 12.5% compounded annual growth rate. With loans given by housing finance companies included, this number would have been around ₹225 trillion, which is more than 80% of India’s gross domestic product (GDP).

Over the past decade, the banking system, which has been the primary provider of formal private-sector credit in India, has lost share to non-bank sources. The share of banking credit net of bank lending to NBFCs declined from around 70% in 2009-2010 to around 60% in 2022-2023. For those borrowers who do not have access to formal bank credit, NBFCs proved to be a critical source of loans, growing eight times and now representing 16% of TPSC.

With the growth and wider reach of mutual funds and insurance companies, household and corporate savings have been channelled into corporate bonds and commercial paper markets in India. The commercial paper market supports the short-term financing requirements of private companies. The share of the bond market net of lending to NBFCs has remained stable at around 14% over the past 13 years.

ECBs or foreign currency loans of Indian corporates have also increased during the last decade. This was probably driven by a period of cheap dollar funding, as the Fed funds rate in the US hit its zero lower bound, but ECBs have remained almost constant as a share of TPSC at around 10%.

We estimate India’s nominal GDP will grow to around ₹565 trillion (around $7 trillion) by 2030, which implies an incremental TPSC demand of around ₹210 trillion ($2.5 trillion). This is unlikely to be funded by commercial banks alone. Domestic as well as foreign bond markets and NBFCs will have to meet much of the additional financing requirement by corporates and households, respectively.

Going by the current shares of TPSC sub-components, we estimate that the contribution of banks (excluding NBFCs) will be around ₹125 trillion ($1.5 trillion), while domestic bond markets and NBFCs will contribute around ₹30-35 trillion ($400 billion) each, and foreign currency loans (ECBs), around ₹20 trillion ($250 billion). These are daunting numbers, and if trends over the last decade are indicative, then non-bank financing sources must fund a bigger chunk of this burgeoning credit demand than many would have anticipated.

So, what could help non-bank financing sources prepare to meet the incremental credit demand needed to power India’s economic growth over the rest of the decade?

Increasing the liquidity and depth of corporate bond markets—both primary and secondary—can make the financial system less commercial bankcentric. This will also likely require more regulatory coordination between the Securities and Exchange Board of India, which oversees bond markets, and the Reserve Bank of India, which has historically been responsible for credit oversight and regulates as well as supervises commercial banks (in addition to ECBs).

Over time, the bond market needs to be made accessible for all borrowers— large, medium and small. Currently, lower-rated borrowers can hardly access bond markets, and credit via this avenue is mostly available to well-rated large borrowers, some of which are quasi-sovereign. We need to develop a deep credit market in India and help distribute risk better for the overall credit ecosystem to perform well.

There has been an increase in assets under the management of long-duration investment entities, like insurance and pension funds, thanks mainly to the increased financialization of household savings. This has been supplemented by larger issuances of longerdated bonds by central and state governments, which have been bought by these investors, resulting in a flat government bond yield curve in India. However, the corporate bond market has a low share of long-dated issuances, which are vital for funding infrastructure assets.

Much of the infrastructure creation in recent years has been led by significant capital expenditure on the central government’s part. As the government aims to consolidate its fiscal position and vacates space in the bond market, it is important that the corporate bond market is incentivized to move towards long-dated issuances, so that longterm savings are channelled into infrastructure asset creation.