India's banking woes dampen economic outlook

The banking sector is saddled with $210b in problem loans.

Bloomberg reports that India’s chronic bad debt problem has spiraled beyond the control of the formal banking sector to the extent that it has dampened economic forecasts for the country.

"The problems in India’s banking system are self-inflicted mostly because of lack of due diligence," said N.R. Bhanumurthy, a Delhi-based economist at the National Institute of Public Finance & Policy. "Of course this will affect growth."

Also read: Can India ease its bad loan woes before another banking scandal erupts?

Bhanumurthy for now forecasts GDP growth of 6.5% for the current fiscal year which is already below last year’s 6.6% and as well as the most pessimistic forecast of 6.9% in a Bloomberg survey. Economists from Goldman Sachs Group have also released muted growth projections from 8% to 7.6%.

India’s nearly $1.7t banking sector is saddled with $210b of problematic loans especially in the power, steel and telecommunications sectors, further aggravated by a string of fraud scandals that caused public sentiment in the institutions to plunge to an all time low.

There have also been cases of widespread cash shortage as ATM withdrawals surged 12.2% in the second half of the year amidst high demand for rupees on farm spending and looming elections.

Here’s more from Bloomberg: