'GDP to bank credit growth link weakening due to alternatives'

Mumbai: 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 S S Mundra 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 percent in March 2016 from 35.2 percent in March 2014.

The total credit dispensed by the non-bank entities has increased to 37.40 percent in these two years, which is twice the pace of the 19.22 percent 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 percent 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.