Debt overhang, credit a drag on investment: IMF

Balance sheet vulnerabilities pose a downside risk to medium-term growth prospects in many emerging market economies, requiring policy action, the IMF said in its latest annual World Economic Outlook report. “The corporate debt overhang and associated banking sector credit quality concerns exert a drag on investment in India,” it said. 

The global financial lender was apparently referring to the massive fraud at the PNB in which Modi is the main accused. According to the report, the recapitalisation plan for major public-sector banks announced in 2017 will help replenish capital buffers and improve the banking sector’s ability to support growth.

“But, recapitalisation should be part of a broader package of financial reforms to improve the governance of public sector banks, and banks’ debt recovery mechanisms should be further enhanced,” the IMF said. 

“Early recognition of non-performing assets, a reduction of forbearance, and gradually unwinding of the system of implicit guarantees to better align borrowing costs with risk-adjusted returns remain essential for improving credit allocation and containing the accumulation of vulnerabilities,” the IMF said.