Credit has to expand 18-20% for India to become $5 trillion economy

MUMBAI: Achieving the government target of making India a $5-trillion dollar economy by 2024 from around $2.7 trillion at present would require annual credit growth in the range of 18-20%. This kind of growth was last seen following the stimulus in FY11, when bank credit grew 21.5%.
Speaking at the Ficci-IBA summit in Mumbai on Monday, Sunil Mehta, MD & CEO of Punjab National Bank and chairman of the Indian Banks Association, said that to become a $5-trillion economy, the bank credit — which was around Rs 98 lakh crore at the end of FY19 — would need to grow at 20%.Speaking at the same event, Saurabh Tripathi, MD and senior partner, BCG, said that bank credit would need to grow 18% for five years. At the same time, the non-banks would have to play a significant role as they were emerging as dominant lenders in small & medium enterprises (SMEs), retail and housing.

In the case of new-to-credit borrowers, 59% of disbursement in these sectors came from NBFCs, said Tripathi. He added that the inability of banks to manage quality of credit was a hindrance in flow of credit to SMEs and there was a need to issue new bank licences to attract capital into the country.
Economists have been estimating that achieving Prime Minister Narendra Modi’s goal of turning India into $5-trillion economy by 2024 would require a 9% growth rate annually. This, in turn, would place demands on the financial sector for even higher growth. However, bankers say that there isn’t much of private investment demand and most of the credit demand is from retail and government investment in infrastructure.
According to Amitabh Chaudhry, MD & CEO of Axis Bank, all the high-frequency indicators point to things being tough. “Sales are down and working capital cycles are getting longer and bankers have to be cautious,” he said. The opportunities were largely among businesses that have managed to deleverage, he added.
In the last decade, credit growth ranged from a low of 8.2% in FY17 to 21.5% in FY11. The highest growth in bank credit after liberalisation was 37% in FY06. As on August 2, 2019, the year-on-year bank credit growth was 12%, while the year-to-date credit growth was negative.
SBI chairman Rajnish Kumar had last week indicated that the country’s largest bank would increase its lending by 12-14% this year. According to PNB’s Mehta, the demand for bank credit could come from the government thrust on affordable housing and investments in infrastructure. He said that the Bharatmala and Sagarmala projects would boost the logistics sector and provide a push for growth.