Goldman fears PNB could be tip of iceberg, downgrades India outlook
21 Mar 2018
Investment bank Goldman Sachs downgraded its forecast for India's economy on Tuesday in the wake of the Rs13,000 crore (more than $2 billion) fraud at Punjab National Bank, warning it could spark tighter regulation of the banking sector, which would constrain credit growth.
In a note to clients, Goldman Sachs lowered its real gross domestic product (GDP) forecast on India for the year to March 2019 to 7.6 per cent from 8 per cent earlier.Interestingly, Goldman Sachs’ revised forecast of 7.6 per cent GDP growth is higher than estimates by the World Bank and Fitch.
Rating agency Fitch, whose assessment is on financial year (April- March), estimated India’s GDP growth for FY19 at 7.3 per cent, while the World Bank, which follows the calendar year (January-December), estimated India growth in 2018 would be 7.3 per cent.
Similarly, for the year 2019 and fiscal year 2019-2020, World Bank and Fitch have estimated a GDP growth of 7.5 per cent, while Goldman Sachs retained its 2019-2020 growth forecast at 8.3 per cent.
Last month's disclosure of the fraud by PNB, India's second-largest state-run lender, has sent bank shares tumbling.
The case, along with a flurry of smaller loan frauds since reported by other banks, has sparked new concerns that credit growth is unlikely to pick up quickly in an economy where state-run lenders, who account for two-thirds of banking assets, are already saddled with a mountain of bad debt.
Goldman said it feared a regulatory crackdown after the huge PNB fraud, and the mountain of bad debt, could increase Indian banks' provisioning burden and so slow credit growth.
"Markets and investors are questioning whether the problem is more systemic," Goldman analysts wrote in the note, adding that markets feared the fraud would likely offset some of the positive effects of the bank recapitalisation and hit overall credit, investment and GDP growth.
Goldman, which forecasts the Indian economy to grow at 6.6 per cent in the current fiscal year which ends in March, said it retained its 2019-20 growth forecast at 8.3 per cent.
Goldman said its analysts believe PNB was likely to take the hit of the entire $2 billion, wiping off more than a quarter of its net worth.
It also said the average write-downs Indian banks would need to take on impaired loans could be 60-65 per cent over the next two years, higher than the 50 per cent it had assumed earlier, meaning overall provisions would rise.