Mumbai/Bengaluru: Investment bank Goldman Sachs downgraded its forecasts for India’s economy on Tuesday in the wake of a more than $2 billion fraud at PNB, warning it could spark tighter regulation of the banking sector that would constrain credit growth.

In a note to clients, Goldman Sachs lowered its real GDP forecast on India for FY19 to 7.6 per cent from its earlier 8 per cent.

Last month’s disclosure of the fraud by PNB has sent the 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 that account for two-thirds of banking assets are already saddled with a mountain of bad debt.

The warning is a blow for the government, which had hoped that a $32 billion bank recap plan  it unveiled last year would help banks to begin to restart lending, spurring elusive job growth in the economy.

PSBs account for the bulk of the close to $150 billion of soured debt. They have already seen the amounts they must set aside to cover bad debts grow due to new  rules, and are staring at further losses as they pursue a host of defaulters through the bankruptcy court.