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Will bad loans paralyze India's growth?
Thu, 8 May Pre-Open

The general election outcome is being watched by bated breath by millions this time around. That it will have positive implications for the economy is almost certain by now. It's fair to assume hence that India stands on the threshold of recovery; albeit a gradual one. And that's rightly corroborated by the Paris-based think tank. OECD estimates 4.9% growth for the Asian economy for calendar year 2014. It also expects it to accelerate to 5.9% the following year. The uptick in capital investments and consumption boost is expected to lift the growth. That's indeed good news! But it is no small feat to have strong economic recovery. That's because there is trouble brewing at the banks.

The OECD has also raised fears of the vulnerability of the Indian economy to the spurt in bad loans of the banking system. As reported by Reuters, the Indian economy has growing threats from the bad loans pile-up that could arrest the economic recovery. Thanks to the prolonged economic downturn and higher interest rates, Indian companies have failed to honor the loan commitments to the lenders. This has resulted into a steady rise in non-performing assets; especially among state-run banks. Reportedly the amount of stressed loans (non-performing + restructured loans) in the system stands at 10% of the total loans. Fitch ratings expect this number to spike to 14% by March 2015.

With bad loans jumping record high, the profits and stocks of the state -owned banks have taken a toll. This has threatened the fresh lending in Asia's third largest economy! Consequently this could slow down new investments and hurt economic growth. And let's not forget that no economy can be strong unless it enjoys the support of a strong and healthy banking system.

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