Improving the financial performance of Indian commercial banks will face a challenge from the impact of the Covid-19 pandemic once asset quality risks emerge in the next fiscal year (FY22), according to Fitch Ratings.
Indian banks reported lower impaired loans and improved profitability for the nine-month period ended December 2020 (FY21) due to various forbearance measures and the continuation of significant radiation.
The disproportionate shock to India’s informal economy and small businesses, coupled with high unemployment and declining private consumption, is not yet fully manifested in bank balance sheets, the rating agency said in a statement.
Indian banks, especially state banks, remained more risk averse than in previous years, which was reflected in their weak credit growth.
Fitch said he expects a moderately worse sector outlook for Indian banks for 2021-2022, based on moderate expectations for new business and revenue generation and deterioration in asset quality.
The Indian government’s less than adequate recapitalization plans for its banks further underline the risk, which will likely keep risk aversion high among banks. This would occur against a backdrop of continued uncertainty about the quality of assets and an uneven economic recovery.
Indian banks’ bad loan ratio fell 130 basis points to 7.2% at 9MFY21, but it has yet to account for the majority of pandemic stress, which is unrecognized due to a judicial intervention or abstention.
As the judicial intervention measures (forbearance) unfold, Fitch expects Indian banks to reverse the improvements in asset quality and profitability. Public sector banks are more vulnerable to higher stress than private banks, which have better profitability and higher contingent reserves and capitalization, he added.