New Delhi [India], April 13 — Systemic risk facing banks in India is likely to remain high in the wake of the second wave of COVID-19 infections and a high proportion of weak loans, S&P Global Ratings has said.
This is even though India’s economic recovery and steps by the Reserve Bank of India and the government to cushion the effects of economic crisis will continue to limit stress on the balance sheets of these banks.
“We estimate the Indian banking system’s weak loans are at 11 to 12 per cent of gross loans. We forecast credit losses will decline to 2.2 per cent of total loans in the year ending March 31, (fiscal 2022) and 1.8 per cent in fiscal 2023.”
S&P said its expected credit costs for banks in India are in line with those for banks in other emerging countries like China and Thailand. However, provisioning coverage in China and Thailand is much higher than in India.
Risks facing banks in India could reduce with stabilisation of credit conditions and progress on non-performing loan (NPL) resolution. Upside risk to our assessment can emerge if credit losses start to show clear signs of declining to expected long-term average levels.
In such a scenario, said S&P, the credit profiles of some financial institutions in India could improve. On the other hand, downside risks can emerge if the improving trend in the economy reverses and the slowdown is much more severe or prolonged than current forecasts.
Indian banks’ reported NPLs likely surged in the last quarter of fiscal 2021. A large portion of the increase will be driven by the country’s apex court’s lifting of a ruling that barred banks from classifying any defaults as nonperforming assets.
The balance sheet weakness in smaller businesses is likely to contribute to incremental NPLs for Indian banks. Service sectors such as airlines, hotels, malls, multiplexes, restaurants and retail have seen a significant loss of revenue and profit on account of COVID-19 containment measures.
Meanwhile, retail loans, especially unsecured personal loans and credit card loans, could also contribute to higher NPLs.
The control of COVID-19 remains a key risk for the economy. New infections have spiked in recent weeks and the country is in the middle of a second pandemic wave.
S&P said some targeted lockdowns have already been implemented and more will likely be needed. The impact of broader lockdowns on the economy could be substantial, depending on their length and scope.
“We believe the speed of India’s vaccination rollout will be critical in mitigating the risk of future epidemic waves. India has one of the highest doses administered globally, at about 104 million,” it said.
“However, given the country’s large population, this is only about seven doses per 100 people, considerably lower than the per capita rate of vaccination among the leading countries in this regard.”
