Home >Industry >Banking >Covid-19: Fitch says Indian banks' asset quality to worsen on lending pressure
Bankers expect asset quality to deteriorate once the moratorium ends. (Photo: Mint)
Bankers expect asset quality to deteriorate once the moratorium ends. (Photo: Mint)

Covid-19: Fitch says Indian banks' asset quality to worsen on lending pressure

  • Public sector banks may be unable to fully adjust risk profiles, given the state’s influence and management instability
  • Bad loans as a percentage of total loans will trend up due to both higher fresh slippages and lower loan growth

MUMBAI: Indian banks will see their asset quality deteriorate by 200-600 basis points (bps) for at least the next two years due to increased lending pressure to revive the credit flow in the economy, Fitch Ratings said on Thursday.

The rating agency, in a report, said recent Reserve Bank of India (RBI) measures, including an extension of the 90-day moratorium on recognition of impaired loans and allowing banks to fund interest on working-capital loans, will put a heavy onus, particularly on state-owned banks, to bail out affected sectors.

"The nationwide lockdown to contain the spread of coronavirus has taken a severe toll on businesses, supply chains and individual incomes. The impact for many micro and small and medium business sectors is structural, a meaningful revival is unlikely even when the lockdown ends," the report said.

In the near term, banks are expected to prioritise asset quality stress management and capital preservation. Public sector banks may not be able to fully adjust their risk profiles, in light of the state’s influence and management instability, seen by Fitch as key reasons for poor execution.

"ICICI Bank and Axis Bank’s execution has also been less than satisfactory. However, there is greater management accountability due to the presence of strong institutional shareholders and more intense regulatory scrutiny compared with state-run banks which are ringfenced from certain regulatory powers due to the state's involvement," it said.

According to the rating agency, bad loans as a percentage of total loans will trend up due to both higher fresh slippages and lower loan growth. The impact will be spread over the FY21 and FY22 as the full effect of fresh slippages will only be reflected meaningfully after regulatory forbearance ends.

"Signs of impending pressures were evident in the early Q4 FY20 results from private banks, which will increase from the first half 0f FY21 despite the relief measures announced by the authorities. The slowdown will pressure asset quality across sectors and segments," it said.

Private banks, meanwhile, which have either better asset quality or loan-loss cover than state-owned banks, remain exposed due to their large retail books, notably in unsecured personal loans and credit cards.

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