Modi govt's war on NPAs may boost India’s growth by 60 bps; Goldman Sachs explains how
The government’s war on non perfroming assets (NPAs) could give a boost of 60 basis points to India’s GDP in FY20, a report by global brokerage said. The measures taken by the Modi government including recovery of bad loans and bank recapitalisation will reduce costs for lenders, Goldman Sachs said. Decline in credit costs will help banks to lend more money to productive purposes, it added.
The global investment bank said that the same could be achieved through gentle trends in bad loans and the healthier NPA provisioning ratios that “proactive policies have engendered over the past two years”.
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“We estimate that credit costs — how much banks set aside each year to deal with bad loans — could fall from a peak of 230 basis points of banking system assets, or around 3.3 trillion rupees ($48 billion), in FY18 to 120 basis points, or 1.9 trillion rupees, in FY20,” Bloomberg reported the brokerage as saying.
“This decline in credit costs would boost bank profitability, reduce headwinds to bank capital growth and enhance the capacity of the banking system to extend credit,” analysts led by Jonathan Sequeira, wrote.
However, the growth can suffer too if a few of the assumptions made by it don’t come true, Goldman Sachs also said.
The International Monetary Fund (IMF) has already slashed India’s GDP growth forecast for 2019-20. Earlier this month, Reserve Bank of India (RBI) pegged fiscal year 2020 GDP growth at 7.2 percent, down 20 basis points from the forecast made by it in February.
The Indian economy grew 6.6 per cent in the quarter ending December, the slowest in five quarters. That prompted the Central Statistics Office (CSO) to trim its 2018-19 forecast to 7 per cent in the month of February from 7.2 per cent estimated in the previous month of the fiscal.