The International Monetary Fund (IMF) today said India’s Debt-to-GDP ratio increased from 74% to 90% during the COVID pandemic. It was also noted that the Debt-to-GDP ratio is expected to reduce to 80% with the assumption that in the medium term there will be healthy economic growth in India. The Debt-to-GDP ratio worldwide increased to 97% in 2020 and is expected to slowly reach 99% in 2021 before it stabilizes close to but below 100%. Japan ranks at the top with a Debt-to-GDP ratio of 234% followed by Greece at 181%.
More than one third of the loans in India were under moratorium and banks were barred from classifying them as NPAs. With the moratorium relief coming to an end it is expected the gross NPAs of banks will increase to 9.6-9.7% in 2021 and 9.9-10.2% by March 2022. To offset this, banks will attempt to increase lending activity.
However, given the weak economic structure owing to COVID and high default levels, increasing lending is unlikely to resolve the issue. Rising defaults will also put financial institutions’ profitability at risk, credit contraction will take place, they will face difficulties maintaining adequate capital and since higher levels of bad loans impact profitability, shareholder returns will be negatively impacted as well. However, banks with low NPA including high quality lenders could potentially benefit from this scenario.