A decline in credit costs of Indian banks is likely to boost the capacity of lenders to extend loans and, in turn, boost growth in the world’s fastest-growing major economy.
Analysts at Goldman Sachs Group Inc. said India’s measures to improve the recovery of bad loans and a recapitalization plan equivalent to 1.1 percent of gross domestic product will lower costs for lenders.
“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," the analysts said in a note.
“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.
The analysts estimate the decline in costs will raise loan growth by 140 basis points, which in turn should bolster investment growth by 200 basis points. All in all, that should translate into a 60 basis points boost to economic growth in the financial year ending March 2020.
India has the highest stressed-asset ratio among the world’s major economies.
While bank loans have been growing at a steady pace of 14 percent year-on-year, investments in Asia’s third-largest economy have lagged. The latest data from the Center for Monitoring Indian Economy show that the total value of new projects in the quarter that ended in March fell to 1.99 trillion rupees from 3.12 trillion rupees in the three months through June.
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