India is on track to become a $5 trillion economy by 2027 and at present, there are no visible signs of overheating, Reserve Bank of India Deputy Governor Michael Patra said in a recent speech delivered in Cambodia.
"Bank credit is monitored as a lead indicator of overheating," Patra said in the speech published by the RBI on Thursday.
"Our assessment, based on a menu of approaches, indicates that current rates of credit expansion are not pointing to systemic stress building up – warning lights flash in the Indian context at growth rates of 16-18%."
Indian bank loans rose 19.8% from a year earlier in the two weeks to Aug. 25, the latest RBI data showed.
This growth has been boosted by a merger between India's largest bank HDFC Bank Ltd and HDFC Ltd, which became effective July 1.
Net interest margins in the banking system are averaging around 3.8%, below the 5% threshold, Patra said. Beyond that level, it could have implications for financial stability.
The deputy governor said the current episode of bank credit expansion is led by retail loans and since these loans are being distributed across a wider borrower base, they mitigate the accumulation of systemic risk.
"We are, however, watchful as herding by banks in the retail loan space might lead to potential cascades across the system if defaults do occur," he said.
