Historical correlation between GDP growth and banks’ credit expansion is fast eroding due to proliferation of other institutions, and lenders will have to make a slew of changes to regain their share, Reserve Bank Deputy Governor SS Mundra on Wednesday said.
“I think the link between the bank credit and GDP has weakened over the years as banks have started accommodating companies through other sources like commercial paper (CP) and bonds,” Mundra said at an event here.
He said the share of non-bank sources like NBFCs, housing finance companies and CPs has increased to 38.6 per cent in March 2016 from 35.2 per cent in March 2014.
The total credit dispensed by the non-bank entities has increased to 37.40 per cent in these two years, which is twice the pace of the 19.22 per cent growth reported by banks, he said.
Mundra said a “stable multiplier” of real GDP growth and bank credit may emerge only in the medium term, once the banks overcome a slew of impediments.
These include tiding over the asset quality stress which they are reeling under, revival in private sector investments and when inflation starts trending lower, which will lead to lower lending rates and push loan demand.
Mundra added that banks will continue to remain the mainstay of finance for the economy.
He said for the first 14 years of this century, the credit growth has averaged 1.6 times the GDP growth.
Banks recorded a multi-decade low in credit growth last fiscal which did not even break into double digits, while the GDP rose 7.6 per cent under a newer method of calculation.
The bad assets-saddled lenders are yet to witness a revival in credit demand with project loans yet to pick up.
Mundra said in the coming years, infrastructure will continue to require credit, given the estimates on the investments coming in.
Mundra used a sports analogy to drive the point forchanges in the infrastructure sector, saying many of the players of the past are “retired hurt” and there is a need for new talent to emerge.
The infrastructure segment has been one of the biggest pain points, contributing to a bulk of the NPAs for banks.
While speaking on the GDP growth to credit growth ratio, Mundra acknowledged there are a few ‘complications’ like non-capturing of trade credit data, double counting in case of NBFC and HFC credit and a shift to the gross value added (GVA) growth from the traditional GDP.
He also said banks need to put in place an efficient way of demand projections for the credit supply. Mundra also drew attention to non-bank lenders’ and housing finance companies’ increased borrowing from the banking system, asking if it is akin to “outsourcing” of core activities by the banks to other entities.
He said the incremental borrowing of the NBFCs and HFCs from the banking system grew 14 per cent and 13.2 per cent, respectively, in year to March 2014, which went up to 18.6 per cent and 20.2 per cent in March 2016.
“The only point I am trying to make is that banks have to be aware of it, why it is happening and whether it is outsourcing of some of the core activities which banks themselves can do. Moreover, is it creating any concerns around the interconnectedness,” he said.
He was, however, quick to add that “I am not suggesting anyway whether it is more or less or it is worrisome.”