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Setting The Priorities Right (Shri S. S. Mundra, Deputy Governor September 28, 2016 at the 3rd SBI Banking and Economics Conclave in Mumbai)

News and Press Release - Dated:- 1-10-2016 - At the outset, I would like to thank Ms. Bhattacharya and State Bank of India for inviting me to speak at this important and eagerly awaited event on the annual calendar. It is a privilege to speak before this august gathering. In context of the theme of the conference i.e. Laying the Foundations for India s Growth , I would say that there are reasons to be optimistic on several fronts: Growth, inflation, demography, entrepreneurship, democracy, polit .....

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much spoken area of stressed assets. (A) Economics of Banking Since the Conclave is meant for both Bankers and Economists, let me begin with something to engage the Economists. Credit is a necessary & probably most important ingredient for economic growth. Is there a measurable co-relation between credit growth and GDP growth? I have been trying to seek answer to this question for some time now. Few explanations which I came across are: The historical average credit multiplier to nominal GD .....

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ing companies through other sources like CPs, bonds, etc. and other non-bank entities also enhanced their share. But still Banks remain the main source of finance for the economy. Perhaps the co-relation is more relevant between the banks' total accommodation to companies and real GDP rather than only credit & GDP. However, the composition of credit to the economy itself has been changing as depicted below (Table 1). While Credit from banking system has gone up by 19.22% between March 14 .....

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.7 Mar-16 7469.93 6811.18 20192.96 2602.40 8615.68 45692.15 72732.03 118424.2 Source: Supervisory Returns (RBI & other regulators) Then, do we see any co-relation with the total credit supply rather than bank credit alone? (Yes/ No/ May be) Added Complications Trade credit plays an important role but not captured in a similar way as other components Double count in respect of NBFCs/HFCs Migration from GDP to GVA may make it more difficult to analyse past trends and establish new benchmarks a .....

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the economists present here to work towards possibilities of modeling such a co-relation. (B) Supply Side of Credit Broadly accepted estimations place credit growth need in the range of 12 to 15% to support the projected growth in the intermediate term. Questions to ponder over: Resources to support credit growth while being mindful of Asset- Liability mismatches Capital needed- Quantum & Composition (CET1/Tier I/Tier II) Economic priority of the segment needing credit vis-à-vis bank .....

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ference between gross financial savings and financial liabilities during the year. Source: CSO. GNDI: Gross National Disposable Income Key observations: Decline in Household savings Stagnant net financial savings Household indebtedness increasing Table 3: Growth Rate of Bank Deposits (in %) Bank Group PSBs PvtSBs Foreign Banks All Banks Mar-12 13.1 16.8 15.1 13.8 Mar-13 14.0 18.5 3.9 14.4 Mar-14 13.1 14.2 22.4 13.7 Mar-15 8.9 16.5 15.0 10.7 Mar-16 4.6 17.3 13.2 7.6 Key observations: Rate of grow .....

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Public Sector Banks Private Sector Banks Foreign Bank Group Scheduled Commercial Banks CRAR 31-Mar-15 11.44 15.73 16.81 12.96 31-Mar-16 11.82 15.68 17.08 13.32 CET I Capital Ratio 31-Mar-15 8.26 12.77 15.55 10.01 31-Mar-16 8.66 13.11 15.9 10.49 Tier I Capital Ratio 31-Mar-15 8.73 12.8 15.57 10.33 31-Mar-16 9.13 13.16 15.92 10.81 Tier 2 Capital Ratio 31-Mar-15 2.72 2.93 1.25 2.64 31-Mar-16 2.68 2.52 1.16 2.51 Overall capital position in the banking systems appears adequate at present; however, fe .....

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cent episodes of KYC/AML violation, Cyber/FinTech related security incidents have heightened operational risk for banks Pension Funding- Gaps could still be there IFRS - Fair value treatment would potentially enhance capital requirements for banks Provisioning Requirements Substandard, Doubtful and Loss advances constitute nearly 36%, 59% and 5% respectively of the stock of non-performing assets (Rs. 611 thousand crore) of the banking system as on March 2016. Though, I won t like to hazard a gue .....

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on and taxes of ₹ 2,46,067 for the sector as at the end of March 16. Incidentally, there is considerable divergence between the earnings of different bank groups as can be seen from the Table 5 below: Table 5: Earning Before Provisions & Taxes (in Rupees crore) Period Public Sector Banks Private Sector Banks Foreign Banks Scheduled Commercial Banks 31-Mar-15 139,159 69,850 25,192 234,200 31-Mar-16 137,151 84,378 24,537 246,067 Source: OSMOS returns, RBI Other potential factors with a b .....

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act on their part could have repercussions both for our arguments and also for instruments that can be treated as eligible under LCR framework. Climate Change Protocol Discussion in the international forum is veering towards penalizing industries which add to carbon emissions and banks may be forced to hold additional capital for loans to such industries on account of increased risk weights. Key takeaways: Every bank should estimate its own requirement of capital under different scenarios inclu .....

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7; 55.74 lakh crore in infrastructure with banks expected to meet 23% of this requirement. Though, there is still some time to go before the end of the plan period, apparently, the investment target as well as bank credit may fall short of the projection. Assuming the current pace of credit growth & that the banks continue to meet 23% of the infrastructure funding needs of the country between 2016 and 2020, they may be required to lend between 17 and 26% of their total incremental bank credi .....

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ecessary enablers are in place. b) Agriculture As per the 2011 Agriculture Census, - 60 per cent of the population depends on agriculture - sector provides employment to 55 per cent of the work force - contribution of agriculture to the national GDP is around 17% - No. of farmers holding marginally sized land has increased substantially from about 36 million in 1970-71 to 93 million in 2010-11 highlighting the continuous fragmentation of lands which discourage mechanization, lower labour product .....

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riculture Loan outstanding (No of A/cs in actual & Amount in crore) Crop loan Term loan Total Year No. accounts Amount Outstanding No. accounts Amount outstanding No. accounts Amount outstanding 2014 39049508 397718 11766229 179048 50815737 576766 2015 43209609 471888 11966785 175133 55176394 647021 2016 46854333 542458 11952483 175715 58806816 718173 While credit flow to agriculture sector has increased over the years, the long term credit in agriculture or investment credit has shown a dec .....

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odies for irrigation, agriculture insurance etc. only the incremental measures may not be sufficient to improve the state of agriculture in the country. Attempts must be made to target the entire agriculture value chain financing rather than on a solo level. Further, the PSBs need to take a hard look at their approach for posting their staff in rural areas. Currently, there is a very high turnover in the staff in rural branches which hampers a focused approach. c) MSME 12th Five Year Plan (2012- .....

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