RBI Working Paper No. 14/2020: Asset Quality and Credit Channel of Monetary Policy Transmission in India: Some Evidence from Bank-level Data

Last updated: 18 December 2020

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A new Reserve Bank of India working paper, No. 14/2020, examines the link between the asset quality of Indian scheduled commercial banks and how monetary policy influences credit growth. The study concludes that while India has a strong credit channel for monetary policy, poor bank asset quality weakens its effectiveness. Strengthening banks' capital positions is crucial for monetary policy to have its full impact. The paper also suggests that banking system asset quality issues, economic slowdowns, and slower deposit growth have contributed to credit deceleration since 2013, though accommodative monetary policy has helped mitigate this.

Reserve Bank of India

Date : Dec 15, 2020

RBI Working Paper No. 14/2020: Asset Quality and Credit Channel of Monetary Policy Transmission in India: Some Evidence from Bank-level Data

Today the Reserve Bank of India placed on its website a Working Paper titled “Asset Quality and Credit Channel of Monetary Policy Transmission in India: Some Evidence from Bank-level Data” under the Reserve Bank of India Working Paper Series*. The Paper is authored by Janak Raj, Deba Prasad Rath, Pratik Mitra and Joice John.

This paper assesses the impact of asset quality of scheduled commercial banks in India on the credit channel of monetary transmission by analysing the determinants of bank credit growth. It finds that a robust credit channel of monetary transmission exists in India. Its efficacy, however, is impaired by poor asset quality of banks, while better capital position helps strengthen the transmission. For monetary policy actions to have their full impact on the credit channel of monetary policy, therefore, it is imperative to address the asset quality stress and strengthen the capital position of banks. The paper also finds that the credit deceleration in India since 2013 could be substantially explained by asset quality stress in the banking system, slowdown in economic activity and moderation in deposit growth. The accommodative stance of monetary policy, however, helped cushion this credit growth slowdown.

(Yogesh Dayal)
Chief General Manager

Press Release: 2020-2021/781

FAQ :

The paper assesses the impact of the asset quality of scheduled commercial banks in India on the credit channel of monetary policy transmission.

Yes, the paper finds that a robust credit channel of monetary transmission exists in India.

The effectiveness of monetary policy transmission is impaired by the poor asset quality of banks. A better capital position helps strengthen the transmission.

The credit deceleration since 2013 can be substantially explained by asset quality stress in the banking system, a slowdown in economic activity, and moderation in deposit growth.

The accommodative stance of monetary policy has helped cushion the slowdown in credit growth.