Capital Investments to drive credit growth 16 th June, 2010 Nagarajan Narasimhan Director – Research CRISIL Limited

2. Outline CRISIL’s Macroeconomic outlook Banking credit growth to revive Banks need to monitor asset quality Banks well capitalised to support growth

3. CRISIL’s Macroeconomic outlook

4. CRISIL’s Macroeconomic outlook

5. Industry leads recovery in out of 17 industries in IIP recorded positive growth during Apr-09 to Feb-10 Revival in economy has resulted in higher capacity utilisation, growth in revenues and improved profitability for Indian corporates GFCF growth, after being subdued over last 2 years, is expected to grow by 12.5% in

6. Banking credit growth to revive

7. Global economic meltdown impacted industry in early 2009… Due to their leveraged capital structure, these sectors were particularly hard hit by the decline in demand following the global economic meltdown.

8. … but situation has improved in last 3 quarters for Corporate India Based on sample of 200 leading companies across 22 different sectors Source: CRISIL Research Upward trend in revenues along with positive economic indicators points to better days ahead

9. Commercial sector’s high dependence on banking credit

10. Backdrop for credit growth

11. Advances to grow over 20% annually over next 2 years P: Projected Acceleration in economic growth, sustained thrust on infrastructure and recovery in exports to support growth in banking credit Term loans to corporates for financing capital expenditure projects would be the largest contributor to growth in banking credit Retail credit to revive due to growth in housing and auto loans

12. Infrastructure to drive investment growth E: Estimated; P: Projected ; Other manufacturing includes Cement, Automobiles, Textiles, and Fertilisers Other infrastructure includes Irrigation, Urban infrastructure, and Airport Infrastructure Infrastructure investments to grow at a CAGR of 17% over next 2 yearsInfrastructure investments Latent demand to drive investments in power, telecom and gas distribution A need for quick and efficient transportation of passengers and goods to drive investments in sectors like roads, railways, ports and airports India’s competitiveness as a manufacturing destination would drive investments in steel, aluminium and automobiles

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14. Proportion of bank lending to infrastructure to increase further Banks will continue to play a crucial role in financing infrastructure projects –Share of infrastructure lending in industry credit has increased from 16% in March 2004 to 29% as of March 2010 –Expected to reach low-to-mid 30s over next 2 years However, development of secondary market for infrastructure bonds and success of take-out financing is critical to support investment in infrastructure

15. Banks need to monitor asset quality

16. GNPAs expected to increase to 3.6 per cent by Some of the restructured assets likely to turn into NPAs –Industries like Iron & Steel, Textiles, Commercial real estate, Infrastructure and chemical & pharmaceuticals contributed to 50%- 55% of the restructured assets Banks require Rs 620 billion to meet new provisioning norms by March 2011 Close watch on asset quality and risk-based credit pricing are the need of the hour P: Projected

17. Banks well capitalised to support growth

18. Government’s thrust on capitalisation bodes well for industry As of , every Indian bank had a CAR of over 10 per cent Only 20% of the banks, mainly PSBs, had a Tier-I CAR of less than 8% Hence, government’s thrust on capitalisation by budgeting Rs 165 billion augurs well for PSBs High net worth to net NPA ratio also provides adequate comfort