‘Corporate debt, a drag on investment’

Washington DC (USA): The corporate debt overhang and associated banking sector credit quality concerns exert a drag on investment in India, the International Monetary Fund (IMF) said on Tuesday, in an apparent reference to the PNB scam involving diamantaire Nirav Modi.

Balance sheet vulnerabilities pose a downside risk to medium-term growth prospects in many emerging market economies, requiring policy action, the IMF said in its 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.

According to the fund, the recapitalisation plan for major public-sector banks in India, 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 IMF, in Turkey, limiting balance sheet currency mismatches and high exposure to foreign exchange risk are urgent priorities, especially with monetary policy normalisation under way in the U.S. and the U.K. (and the resulting possibility of a shift of capital flows away from emerging markets).

Mitigating rollover risk

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.”