UPDATE 2-CIT Group posts Q2 loss on debt charges but beats view

* Company makes progress in retiring high-cost debt

* CEO Thain cautious on growth outlook

* Shares rise 2.8 5 percent

July 30 (Reuters) - CIT Group Inc, the small-business lender led by former Merrill Lynch Chief Executive John Thain, reported its second straight quarterly loss but the per-share figure beat analysts' estimates.

The New York-based company, operating under a special oversight agreement with the Federal Reserve Bank of New York since emerging from bankruptcy in 2009, said on Monday the quarterly loss came largely from charges expected from retiring about $4.2 billion of high-cost debt.

The loss of 35 cents a share beat analysts' consensus estimate of a loss of 57 cents, reflecting benefits from debt refinancing in previous quarters and moderately higher lending and credit recoveries.

The company still has $4 billion of debt on which it is paying 7 percent interest that it hopes to retire in coming quarters.

Earlier this year, CIT Group submitted a capital plan to the Fed that would help unwind their agreement and allow the company to return excess capital to shareholders in the form of dividends or share buybacks.

In a conference call with analysts, Thain said the New York Fed has still not responded, but added the company plans to request the ability to return capital in 2013.

CIT Group is also reducing its funding costs through an Internet-based bank opened last year that ended the second quarter with $2 billion in deposits and more than $10 billion in assets.

Thain said the bank also hopes to grow the bank through acquisitions of branches or deposits but has not seen a lot of opportunities and has no strong need for deposits to meet current loan demands.

He also said plans to buy loan portfolios from European banks or other lenders that are slimming down have been stymied by lack of opportunity. The loans available have low yield and banks "have been unwilling to sell them at appropriate discounts," he said.

CIT Group's net loss widened to $71 million, or 35 cents per share from $50 million, or 25 cents per share, in the second quarter of 2011. Pre-tax income, excluding the charges, was $245 million, up from $134 million in the year ago quarter.

Its shares were up 2.8 percent to $35.78 on the New York Stock Exchange.

Credit quality at the lender, whose businesses also include a growing aircraft and railroad car leasing division, continued to improve.

Net charge-offs fell to $17 million, or 0.33 percent of average finance receivables, from $55 million a year earlier and from $22 million in this year's first quarter.

Non-accrual loans on which CIT Group does not expect timely payments were down to $455 million from $1.1 billion a year earlier and $482 million in the first quarter.

The company set aside just $9 million for potential credit losses, down from $84 million in the year-ago quarter.

Through credit quality was far better than most estimates, CIT Group said it was unlikely to derive much more benefit from reduced credit costs in the future because so much progress has been made already.

"We're kind of near cyclical lows here," Chief Financial Officer Scott Parker said on the call.

Thain forecast its overall business in the United States will parallel the fate of the U.S. economy. " is growing, but growing slowly," he said, predicting 1.5 percent growth in gross domestic product.

Internationally, the company is experiencing a slowdown in Brazil, has little exposure to Europe and remains confident about its business in China, despite a moderate decline in that nation's growth rate.

Total loans declined $2.2 billion to $20.1 billion, largely due to the sale of $1.1 billion in student loans.