Bankers Doubt Meeting $5-Trillion GDP Target

Credit growth will have to increase “substantially” to over 20 percent annually if the economy were to achieve Prime Minister Narendra Modi’s $5- trillion gross domestic product goal by 2025, warned bankers.

The deepening slowdown, as seen in various sectors of the economy led by plunging consumption-- be its automobiles or even consumer goods--makes a case for more attention, Sunil Mehta, managing director of the state-run lender Punjab National Bank, who also heads the industry lobby Indian Banks' Association, said at the annual Fibac on Monday.

“We can make it ($5 trillion GDP goal) in five years, but will require a lot of enablement because we have seen the slowdown in many sectors. The pace of growth in credit is quite low and to reach the target, we need to grow substantially,” he said.

“For the next five years, the credit system needs to grow more than 20 percent each year then only that the $5-trillion GDP goal can be achieved,” Mehta said, adding that means credit supply must nearly double to Rs 188 lakh from Rs 98 lakh crore at present.

However, given the bleeding balance sheet of all banks it is highly doubtful if banks have the balance sheet capacity to meet such a spike in demand if at all it were to happen.

Also, the system-wide bad loans are still in double-digits and bringing them down to a saner level looks a distant dream for the lenders given the pathetic progress in the resolution process at the nascent bankruptcy courts.

It can be noted that of the close to 1,900 companies admitted for bankruptcy resolution only around 50 have been resolved successfully that too with a huge haircut to banks while a couple of hundred have been liquidated leaving big holes in banks' balance sheets.

It can be noted that in the fiscal year 2019 credit growth stood at a low 13.24 percent, which though was higher than around 8 percent in FY18 and 5.4 percent in FY17, which was a five- decades low.

The country’s largest lender State Bank of India has said it expects credit growth to slow down to below 14 percent in FY20 due to subdued demand.

It can be noted that real GDP growth slowed to a five-year low of 5.8 percent for the March quarter and is widely expected to sink further in the June quarter.

The Reserve Bank of India has done a downward review of its FY20 GDP growth estimate to 6.9 percent, but more downward risks.

It can be noted that the economy depends on the banking system for the bulk of its credit requirements, especially in the absence of robust corporate bond markets.

Meanwhile, consultancy firm Boston Consulting Group’s senior partner Saurabh Tripathi said credit will have to grow at 18 percent every year to achieve Modi's goal.

He said despite the difficulties, the shadow banks are needed and are “here to stay”, pointing out that 40 percent of the incremental systemic credit requirements were met by this sector in the last few years.