FY15 GDP growth: Will weak credit growth play spoiler?

Fuelling growth, prospects, challenges and road ahead: that was the big theme at the CII 7th Banking Colloquium held in Kolkata in September this year. It even brought together some of the best minds in the banking industry.

It also saw the release of the CII Deloitte report on the role of banks in a new phase of growth. The report release was followed by a panel discussion which included the heads of banks and other financial institutions.

Even as the market is optimistic about green shoots being visible in the economic recovery, credit growth remains weak, having fallen to the lowest in five years in the fortnight ending September 5.

CNBC-TV18's Gopika Gopakumar moderated a session with a host of banker chiefs such as UCO Bank's Arun Kaul, Canara Bank's RK Dubey and IIFCL's SB Nayar to check with them if the banking system, with its current credit growth rate, can support 5.7 percent or 5.8 percent gross domestic product (GDP) growth that is being expected this year.

Gopika: Bankers are hoping for 14-15percent credit growth for this year but looking at the numbers that we saw last week are you optimistic that bankers will be able to achieve a credit growth target of 13-14 percent?

Kaul: I agree, if you look at the growth, recent figures that have come out, it is below 10 percent. It is probably the lowest we have seen in many quarters in the last many years. However let's not forget two things, one this is a slack season for credit demand. Normally credit growth starts in the second half of the year. Since we still are very large agro-based economy, they start accumulating the raw material in the second half.

However, we do notice not many new projects coming up, not much investments taking place. The growth in the credit we see in the banking industry is primarily coming either from the push the banks are giving on the retail side retail, retail, small and medium enterprises (SMEs) and agriculture or the demand comes from the corporate sector because of the enlarged working capital requirements.

Now, since the second half, growth is normally there; it is a busy season. We do expect that banks will come to Reserve Bank of India (RBI) expectation of 13-14 growth by end of the year.

If you look at the past many years the major growth in credit comes from the fourth quarter. So I hope this year also same trend would continue although the first two quarters or till now the growth is lower compared to previous years but I hope that the second half of the year we will see a good growth and probably we can reach 13-14 percent as projected by RBI.

Gopika: So therefore you are saying that GDP growth of 5-5.8 percent is certainly possible for this year?

Kaul: Should be possible; that is what RBI projections are. If we are able get 13-14 percent growth of credit, we should be able to get a GDP growth of 5 5.5-6 percent.

Q: Are you also sanguine about achieving your credit growth targets for this year?

Dubey: We are already on a way to achieve, we will surely achieve. We had been very aggressive on priority sector, micro, small & medium enterprises department (MSME) and retail portfolio where the growth had been priority sector about 30 percent plus, retail around 40 percent and MSME around 30 percent.

Corporate credit growth the wholesale business is around 10-12 percent; it is much lesser but we found some pickup in some sectors where our existing clients had been coming. Projects which were stuck up are coming on way. So, I hope even if 12-13 percent corporate growth is there we could definitely achieve our credit growth in Canara Bank.

Q: We have seen a spate of measures taken by the RBI. In order to stimulate growth clearly we need to step up funding for infrastructure. Do you think regulations or measures like the 5:25 rule which RBI has come out with to help infrastructure financing can really solve this problem at this point in time?

Nayar: I really don't think it can solve this problem in a very short period. The 5:25 scheme itself which took us two years to convince RBI now to carry it on board, basically it was to reduce the fear of lending to large projects in infrastructure because the risk of non-performing assets (NPAs) goes down, the recessing goes down.

However that will take some time, banks have to put through a credit policy and that has to be approved by the board it will take sometime to take off. However, the given scenario now, like Mr. Dubey said there are not many new projects coming up. If at all any credit growth will take place it must be through cross-over and funding, which almost every single project is coming up with. Not entirely to be blamed to the project promoters or the projects, it is due to factors outside their control.

However other then that we will have to wait for some more time. In fact we have been holding this investor relations meetings, I just came back from some meetings in London and Germany. They are all saying that we would like to invest in India, we are watching India keenly but then there is still a lot more things you need to do in addition to improving the segment. They say that you also need to make it a much easier place to do business with.

Investors are comparing India to other countries, they say India is still a very difficult place to deal with. So this needs to be changed also. Additionally even if the investment climate improves for large projects and infrastructure, I don't know what will be the capability of the banks to lend further because we are all aware of Basel III coming in, we are all aware of the capital requirements, we are all aware the constraints in capital funding and also the sectors caps and these last two years have also been a bitter lesson for the banks. I think they will approach these projects little more cautiously. So therefore we also need to look at outside the bank to fund these projects.