Increased pressure to lend will erode the asset quality of Indian banks by 200-600 basis points for at least the next two years, Fitch Ratings said.
The latest measures announced by the Reserve Bank of India (RBI), 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 burden particularly on state-owned banks to bail out affected sectors, the ratings firm said in a note on Thursday.
“The lockdown to contain the spread of the virus 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," it said.
In the near term, banks are expected to prioritize 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 because of the presence of strong institutional shareholders and more intense regulatory scrutiny compared with state-run banks, which are ring-fenced from certain regulatory powers because of the state’s involvement," it said.
Bad loans as a percentage of total loans will trend up because of both higher fresh slippages and lower loan growth, according to Fitch.