Corporate debt overhang exerts drag on investment in India: IMF

The corporate debt overhang and associated banking sector credit quality concerns exert a drag on investment in India, the IMF today said in an apparent reference to the PNB scam involving billionaire diamantaire Nirav Modi.

Balance sheet vulnerabilities pose a downside risk to medium-term growth prospects in many emerging market economies, requiring policy action, the International Monetary Fund (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 Rs 11,400-crore fraud at the Punjab National Bank 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.

"However, 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.

According to the report, in Turkey, limiting balance sheet currency mismatches and the high exposure to foreign exchange risk are urgent priorities, especially with monetary policy normalization under way in the United States and the United Kingdom (and the resulting possibility of a shift of capital flows away from emerging market economies).

Moreover, given that sudden repricing of term premiums remains a distinct possibility and that portfolio shifts could occur, it is important to mitigate rollover risk by avoiding excessive reliance on short-term borrowing.

"Regulators in China have taken important measures to rein in shadow banking and bring financial activity back onto bank balance sheets, where capital and provisioning requirements provide greater loss absorption capacity than in opaque off-balance-sheet channels," the IMF said.

Nevertheless, total credit growth remains high, it 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.