SBI launches mobile wallet. (Image Source: Prashanth Vishwanathan/Bloomberg)

Bad Loans Remain A “Binding Constraint” On Growth: JPMorgan

Bad loans on the books of Indian banks continues to be a binding constraint on investment and growth in the economy, said Jehangir Aziz, head of emerging Asia economic research at JPMorgan in an interview on the sidelines of an investor forum organised by the bank in New Delhi.

Aziz added that while the recognition of bad loans is a step forward, an agreement on a long-term solution, such as privatisation, is needed.

Gross bad loans across 39 of India’s listed banks rose to Rs 6.3 lakh crore, up 96.46 percent compared to a year ago. IDFC Bank and RBL Bank are not included since comparative data for last year is not available.

The government has allocated Rs 70,000 crore for capital injections into government-owned banks over a four-year period between 2015-16 and 2018-19. The amount is far lower than the $90 billion in capital that banks are estimated to need by 2019, according to Fitch Ratings. The shortage of capital has forced banks to try and tap the capital markets. The response from investors, however, has been cautious. State Bank of India which went to the market to raise additional tier 1 (AT1) bonds on Wednesday raised $300 million compared to the $500 million it had targeted.

New Monetary Policy Framework

Commenting on the new monetary policy framework, under which interest rate policy will be decided by a committee, Aziz said that this change may not necessarily mean a change in interest rate expectations. The 4 percent (+/-2 percent) inflation target set under the new framework means that the committee will have to work towards that objective irrespective of individual views and ideologies.

Even so, Aziz sees some scope for a reduction in rates in the near term because of the drop in consumer inflation, which fell to near 5 percent in August.

Global Volatility

After a period of relative calm, global markets have turned volatile in recent weeks as investors reassess expectations of central bank action. Long-term bond yields across markets like the U.S., Europe and Japan have risen on indications that central banks may change the mix of securities they are buying to prevent a further fall in yields. Aziz says this bout of volatility is a normalisation of conditions as the excessively low volatility seen in previous months was not sustainable.

Aziz expects the U.S. Federal Reserve to raise rates one more time this year. This will likely happen only after the U.S. presidential elections, he said.