Bank lending to remain weak

The Reserve Bank of India cut its policy rate by 25bp earlier this month, and subsequently called upon commercial banks to pass on the cut to borrowers. But the move is likely to have a negligible impact on lending growth to the private sector. After all, banks remain burdened by a sharp build-up of bad debt in recent years, and concerns about meeting global capital requirements have caused lending growth to plummet. As we have argued previously, large-scale capital injections, and increased private participation, are required to get banks to lend again. Until progress is made on this front, the banking sector will remain a constraint on India’s growth prospects over the medium term.