India’s measures to improve the recovery of bad loans and a recapitalization plan equivalent to 1.1 percent of GDP will lower costs for lenders and boost the growth of Asia’s third-largest economy, according to Goldman Sachs.
Analysts at the bank said that a decline in credit costs of Indian banks is likely to boost the capacity of lenders to extend loans and, in turn, boost GDP growth.
“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 [US$48 billion], in FY18 to 120 basis points, or 1.9 trillion rupees, in FY20,” the analysts said, as cited by Bloomberg.
They added that: “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.”
According to the analysts’ estimates, the decline in costs will raise loan growth by 140 basis points, which in turn should boost investment growth by 200 basis points. That should translate into a 60-basis-point boost to economic growth in the financial year ending March 2020.
Data from the Center for Monitoring Indian Economy showed investments in the world’s fastest-growing major economy have lagged despite the fact that bank loans have been growing at a steady pace of 14 percent year-on-year. The total value of new projects in the quarter that ended in March dropped to 1.99 trillion rupees from 3.12 trillion rupees in the three months through June.