Rising bad loans threaten India's gradual economic recovery - OECD

NEW DELHI Tue May 6, 2014 3:47pm IST

A customer hands a bundle of rupee notes to a teller at a financial institution in Mumbai July 2, 2013. REUTERS/Vivek Prakash/Files

A customer hands a bundle of rupee notes to a teller at a financial institution in Mumbai July 2, 2013.

Credit: Reuters/Vivek Prakash/Files

Related Topics

NEW DELHI (Reuters) - India's economy will likely make a gradual recovery this year, helped by a rebound in capital investments as well as a pick-up in private consumption, but rising bad loans at its banks threaten to choke the recovery, the OECD said on Tuesday.

In its latest economic outlook, the Paris-based think tank said growth in Asia's third-largest economy was expected to edge up to 4.9 percent in calendar year 2014 from 4.5 percent a year earlier and accelerate further to 5.9 percent in 2015.

The estimates are predicated on hopes of an upturn in capital investments after an ongoing national election and a boost in consumption driven by slowing inflation.

India is facing the worst economic slowdown since the 1980s as investment growth has hit an 11-year low. Capital investment contributes nearly 35 percent to India's economy, but it probably barely grew in the fiscal year that ended in March.

To break the investment logjam, a prime minister-headed panel, known as the Cabinet Committee on Investment, has cleared projects worth about 6 percent of gross domestic product.

"Investment is to rebound after the spring general elections and as large investment projects recently approved by the Cabinet Committee on Investment are gradually implemented," the OECD report said.

The report urged New Delhi to rapidly carry out pending labour, fiscal and tax reforms for a faster economic revival. It also backed a Reserve Bank of India panel's proposal for moving to an inflation target of 4 percent in three years while setting monetary policy, sharply below current levels.

"The proposed inflation targeting framework will help anchor price expectations and improve business sentiment and consumer confidence," it said.

The report, however, flagged off rising bad banking assets at Indian lenders as a major risk to the country's economic recovery.

The economic slowdown and higher interest rates are making it tougher for companies to repay loans, leading to a steady growth in non-performing assets, especially among state-run banks.

Stressed loans in India - those categorised as bad and restructured - total $100 billion, or about 10 percent of all loans. Fitch Ratings expects stressed assets to reach 14 percent of loans by March 2015.

This has made some lenders shift focus from corporate lending to consumer credit, which is mostly secured against borrowers' assets, contributing to a slump in capital investment.

"On the negative side, failure to halt the rise in non-performing loans could derail the pick-up in investment," the report said.

(Reporting by Rajesh Kumar Singh; Editing by Jacqueline Wong)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Pharma

REUTERS SHOWCASE

Modi's U.S. Trip

Modi's U.S. Trip

PM Modi to get rock star reception in New York.  Full Article 

Northeast Floods

Northeast Floods

Landslides and floods kill 22 in northeast India.  Full Article 

Food Subsidy

Food Subsidy

Ram Vilas Paswan says no plans to raise food handouts.  Full Article 

New Plants

New Plants

Canadian auto parts maker Magna to open two new plants in Gujarat.  Full Article 

Importing Iron Ore

Importing Iron Ore

JSW Steel to import 10 mln T of iron ore due to local shortage.  Full Article 

Breaking Up

Breaking Up

Philips to split off lighting business, form separate company.  Full Article 

End of Monsoon

End of Monsoon

Monsoon starts withdrawing from northwest region.  Full Article 

Border Row

Border Row

Chinese and Indian troops in Himalayan standoff.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage