India best among EMs; health of PSBs, corporates a worry: IMF

IMF's financial counselor said corporate profitability is at a 10-year low with state-run banks posing major problems

India needs to address the stress emanating from leveraged corporate balance sheets and asset quality woes of state-run banks to sustain the recovery process, even as the country is best placed among emerging markets, IMF's financial counselor Jose Vinals said Thursday.

"Vulnerabilities in corporate financial positions and public bank asset quality pose risks to the economic recovery and to financial stability if left unaddressed," Vinals, who looks after the financial stability aspect at the International Monetary Fund (IMF), said during a talk at the Reserve Bank of India.

"To sustain the robust growth in the future and to keep inflation under control and in continuing to keep a lever on fiscal consolidation, it is very important that priority is given to clean-up public sector bank balance sheets and to corporate debt overhang," he said during the talk at the bank's headquarters in presence of Governor Raghuram Rajan.

Other aspects, which can help prop-up the recovery are actions from the government on the supply side front, and reforms in the power and mining sectors, he said.

He singled out the country as being the best placed among emerging markets, but underlined that it has problems of its own which need to be dealt with.

"A country like India faces its own idiosyncratic challenges due to existing weaknesses in corporate and banking balance sheets," he reiterated and acknowledged that work is being done by authorities on this aspect.

Highlighting other problems, he said the corporate profitability is at a 10-year low, large corporates are highly leveraged and  stressed assets in system are over 14% with state-run banks contributing a bulk of the pain.

"Deteriorating corporate and banking sector health can exacerbate risks," he said, warning it can also have adverse impacts on the banks' ability to lend for productive purposes.

The remarks come after a massive clean-up by lenders which saw the listed banks' NPAs rise by Rs 1 trillion for the December quarter, following the asset quality review by RBI after which it asked banks to proactively classify certain problematic accounts as NPAs.

Vinals said the country has taken right steps, like efforts to check inflation including a shift to inflation-targeting, commitment to fiscal consolidation and greater flexibility on forex rates.

Stating the country has high buffers to guard against any potential threat on the external front, he said policymakers should not become complacent and be always vigilant to check vulnerabilities which can impact macroeconomic fundamentals.