Despite the higher-than-anticipated GDP numbers and a rocking manufacturing sector during 2009-10, both credit as well as deposit growth were much lower at around 17 per cent, which is a cause of concern, finance minister Pranab Mukherjee said in Mumbai today.
The banking sector too faced a major challenge with rise in the non-performing assets (NPAs) reported by some banks, the finance minister added. Credit growth for the current year is projected at 20 per cent by RBI and banks will have to step up their performance to ensure that this is achieved, Mukherjee said while addressing the 63rd annual general meeting of the Indian Banks Association (IBA) in Mumbai today.
Noting that many banks posted good results last fiscal, Mukherjee, however, said to meet the growing needs of a fast-growing economy, banks will have to constantly augment their capital base. Listing out the challenges before banks during the current year, he said, the banks will see an uncertain pace of global recovery, exit policy, containment of NPA levels, higher provisioning norms, reduction in operational cost and cost of funds.
Noting that NPAs of some banks had risen and it has a number of negative consequences, Mukherjee said this puts pressure on the lending rates which discourages credit-worthy borrowers. It also "dampens" the effectiveness of monetary policy, he added.
The minister further said the banks may no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates had earlier provided. "This may expose the weaker banks," he said. Despite developments in the global scenario, contribution of our banking sector to the economy has grown and shares of banks have outperformed the market.
However challenges will remain, Mukherjee said, adding the cost of intermediation remains high and bank penetration is low. He added financial deepening has to be accelerated as otherwise, it could constrain the full potential of the economy. "This is essential if India needs to maintain a high GDP growth trajectory," Mukherjee said.