Photographer: Dhiraj Singh/Bloomberg
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IMF Calls for Overhaul of India Banks

  • Bad-loan ratio to rise to 11.1% by Sept. vs 10.2% year ago
  • IMF calls on India to consider privatizing weak, small banks

The International Monetary Fund said India’s record $32 billion bank-recapitalization plan must be accompanied by restructuring of state-run lenders, as the central bank warned of rising bad loans.

Under the baseline scenario in a stress test, the Indian banking sector’s gross bad-loan ratio will increase to 10.8 percent in March and 11.1 percent by September 2018, from 10.2 percent in September 2017, according to the Reserve Bank of India’s Financial Stability Report published late in Mumbai on Thursday. The financial system remains stable, the authority said.

In a separate report published around the same time, the IMF said India should work toward its stated goal of consolidating its banking sector, but should avoid mergers of weak state-run banks with stronger peers.

Why India Is Pumping $32 Billion Into State Banks: QuickTake Q&A

"Exit of the weakest (small) banks should be considered, with voluntary transfer of liabilities and good assets to stronger market participants, leaving bad assets behind in liquidation," the IMF said. "Consideration should also be given to further reducing the state’s ownership stake, including full privatization of some of the banks and access to international bond markets."

It called for a blueprint for restructuring and privatization with clear time frames.

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