United Nations, April 18 : The International Monetary Fund (IMF) has urged India to strengthen the ability of banks to go after debtors and warned that debts negatively impact investments.
"The corporate debt overhang and associated banking sector credit quality concerns exert a drag on investment in India," the IMF's World Economic Outlook report released on Tuesday said.
While the 2017 recapitalisation plan for major public sector banks "will help replenish capital buffers and improve the banking sector's ability to support growth", it "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 report said.
Underlining the seriousness of the bad loans or non-performing assets problem, the Reserve Bank of India said in a December 2017 report that such loans were 10.2 per cent of all the banking assets till September 2017 and was projected to grow to 10.8 per cent by March and 11.1 per cent by September 2018.
Bad loans issue has come to the fore in India in recent months with the disclosure of fugitive jeweller Nirav Modi's alleged $2 billion-scam involving the Punjab National Bank.
Another cautionary note in the IMF report said: "India's high public debt and recent failure to achieve the budget's deficit target call for continued fiscal consolidation into the medium term to further strengthen fiscal policy credibility."
Overall, "the medium-term growth outlook for India is strong," the report said.
"Growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivise private investment," it added.
The IMF reiterated that India was on its way to achieve growth rates of 7.4 per cent for 2018 and 7.8 per cent for 2019 - the highest globally for major economies.
The report pointed out that it "has made progress on structural reforms in the recent past, including through the implementation of the goods and services tax, which will help reduce internal barriers to trade, increase efficiency, and improve tax compliance."
But it stressed that India's important challenge is to enhance inclusiveness for which further reforms are needed.
"The main priorities for lifting constraints on job creation and ensuring that the demographic dividend is not wasted are to ease labour market rigidities, reduce infrastructure bottlenecks, and improve educational outcomes," it said.
(Arul Louis can be reached at email@example.com)