Retail loans, which witnessed a growth of over 40% in FY05 and again in FY06, have been the prime driver of the credit growth in recent years. Retail loans as a percentage of gross advances increased to 25.5% in March 2006 from 22% in March 2004.
In the first three months of FY07, retail credit has grown 47.2% over a year earlier with housing loans increasing 54.3%. Loans to commercial real estate grew 102%, credit to industry 27% and loans to agriculture 37%.
In bank-based financial systems such as India, bank credit plays a critical role in facilitating the growth process and hence credit booms are often positively correlated with a high growthphase of the economy.
Credit booms are often followed bydilution of risk assessment criteria by banks and financial institutions, which may trigger episodes of financial instability. In this regard, financial instability that might result from credit booms, can, in fact, threaten price stability. Therefore, credit booms need to be carefully monitored by policy makers, RBI noted.
