Banks must finance 50% of GDP, says FM

BANKERS' CONFERENCE 2005

Banking industry needs to raise Rs 60,000cr in five years.

Union finance minister P Chidambaram on Friday said that the Indian banking industry would need to raise Rs 60,000 crore capital to push up the loan-GDP (gross domestic products) ratio to 50 per cent. At present it is 35 per cent.

"If we want to achieve the goal of financing 50 per cent of the country's GDP through the banking channel, bank credit must grow at a much faster rate. We will need Rs 60,000 crore additional capital over the next five years. Where will you find this capital?" Chidambaram asked CEOs of banks at the Bankers' Conference (Bancon 2005), organised by Uco Bank in Kolkata, today. He was delivering the inaugural address at the conference.

Since banks' capital adequacy ratio (CAR) is now pegged at 9 per cent, the finance minister hinted at close to Rs 7.5 lakh crore credit growth over the next five years.

The outstanding advances portfolio of the banking industry as on October 14, 2005 was Rs 12,74,268 crore. Last year, bank credit had grown by 32 per cent and the same trend has been seen in financial year 2005-06.

Banks can raise this capital through three ways "� improved profitability, better recovery and raising capital from the market. "You must ask yourselves how will you raise the Rs 60,000 crore capital over the next five years?" Chidambaram told bankers.

He did not offer any suggestion directly but hinted at consolidation to tide over this capital crisis. "Only one Indian bank is among the top 100 global banks "� that is the State Bank of India. It is 93rd on global ranking and 11th in Asia. China's fourth largest bank is two and a half times bigger than SBI and the largest Chinese Bank is 11th on global ranking. So, size is a limiting factor," the finance minister said.

However, average return on capital of 22 Indian banks that featured among the top 1000 global banks is much higher at 32.8 per cent compared to 16 per cent of Chinese banks, 19.9 per cent of banks in Singapore and 18.8 per cent of banks in South Korea.

"Our skilled bankers are running small banks. They should actually run very large banks," Chidambaram said without using the word "consolidation" or referring to "mergers and acquisition" in the Left citadel.

Chidambaram made it clear to the captains of the banks that they cannot afford to ignore the poor any longer and must lend to the underprivileged section of the society.