Mark Mobius of Franklin Templeton Investments says he is very bullish on India and that India remains the second largest holding in his Asia funds. In an interview to television channel ET Now, Mobius said he feels banks will benefit from the economic recovery. Historically that is how economic recoveries have taken place since banks are one of the biggest beneficiaries of such growth.
But there is another attribute of banks: they are one of the first signifiers of an economic recovery. For an economy or a company to grow, one of the first resources needed is money. Non-food credit from the banking sector is one of the key indicators of a pick-up in economic activity.
And if recently released RBI data on this economic indicator are any indicator, there are no signs of a recovery.
A Business Standard report points out that for the fortnight ended September 5, annual credit growth in the banking system fell to 9.68%, the first time in five years that it has gone below 10%. Even during the worst phase of the slowdown, credit flow had not fallen to such low levels.
Which begs the question: Where is the growth everyone is talking about? Markets are touching new highs in anticipation of growth numbers, but the reality is that so-called growth engines are sputtering for want of fuel. R.K. Dubey, chairman and managing director of Canara Bank, says that corporate demand has been slow and there are no signs of pick-up yet.
From the government’s side there has been a lot of talk of restarting stalled projects, but they seem to be little more than lip service. M Tanksale, chief executive of Indian Bank Association, says that none of the stalled projects have been revived so far.
High interest rates have repeatedly been cited as the reason for slow credit offtake. Bankers themselves have asked RBI to cut interest rates in order to spur loan growth. As reported by Business Standard, in a meeting between RBI governor and bank representatives, lenders asked the central bank to cut the repo rate, or the rate at which they borrow from the central bank.
Banks are now faced with a problem of plenty. While credit growth grew by only 9.68%, deposit growth has continued to post exhibit strong growth, rising by 13.78%. This has resulted in banks sitting on high levels of liquidity prompting State Bank of India, the country’s largest bank, to cut deposit rates earlier this week.
But the RBI is unlikely to oblige; on Monday, RBI governor Raghuram Rajan said that no action could be expected on that front, as inflation was still above the central bank's comfort zone.
The recent GDP numbers – 5.7% growth during the June quarter –indicates a turnaround, but key numbers such as non-food credit seem to suggest that the growth number will be unsustainable, at least for the near future.