Booster shot for India: Falling NPAs may spur GDP growth by 60 bps as bank profits rise

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Updated: April 15, 2019 5:44:30 PM

Credit growth has already been coming in at a multi-year high for the last few fortnights, and printed at 13.24 per cent for the fortnight to March 29.

The rise in banks’ profitability, thanks to a steady decline in dud assets, can give a 0.60 percent boost to GDP in fiscal 2020, says a report. This will be possible due to the rise in profits on the back of a decline in credit costs, which is the money that banks set aside to deal with bad loans, will help banks lend more money to productive purposes, it said.

“The fall in credit costs implies a positive supply impact of 1.40 percent to credit growth, which can boost real investment growth by 2 percent and real GDP growth by 0.60 percent financial year,” a report by American brokerage Goldman Sachs said Monday.

The Reserve Bank earlier this month pegged FY20 GDP print at 7.2 percent, down 20 bps from its February forecast.

The brokerage estimates credit costs as a proportion of the total outstanding loans will nearly halve to 1.20 percent in FY20 from the peak of 2.30 percent in FY18. In absolute terms, the fall will be to the tune of Rs 1.9 lakh crore from Rs 3.3 lakh crore.

Credit growth has already been coming in at a multi-year high for the last few fortnights, and printed at 13.24 per cent for the fortnight to March 29.

The brokerage report said for the past nine years, the banking system has grappled with non-performing assets, where ballooning credit costs impaired their capital, constrained credit supply, and was associated with a decline in credit and investment growth.

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Improvements in credit supply will now more likely stem from an improvement in banks’ profitability on a normalisation of bank credit costs, it said. This will be achieved on the back of more benign trends in stress loans and the healthier NPA provisioning ratios that “proactive policies have engendered over the past two years”, it said.

The report said boost to credit growth can be higher if credit costs are lower, banks continue to substitute away from bonds into credit to the real economy, or raise more capital than the baseline. However, on the flipside, growth can be impacted by up to 0.15 percent if some of the assumptions do not come true, it warned.

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