Indian banks to face heightened asset quality, earning pressure for at least 2 years: Fitch Ratings

02 Jul 2020 Evaluate

Fitch Ratings in its report titled ‘Indian banks vulnerable to pandemic related stress’ has said that Indian banks may continue to face heightened asset quality and earning pressure for at least two years, as disruption to business activity and supply chains and shrinking personal incomes damage banks' balance sheets. It said the reported performance of Indian banks for the financial year ended March 2020 does not adequately reflect the incipient stress caused by the pandemic. It added that bank balance sheets are yet to feel the impact of India's strict lockdown measures that were implemented by the government from March 25. Moreover, a meaningful short-term recovery looks unlikely, as the acceleration of new COVID-19 cases threatens the gradual reopening of the economy.

The impaired loan ratios of Indian banks fell during 2019-20 in line with its expectations to 8.5% in 2019-20 from 9.3% in 2018-19, driven by fewer fresh impaired loans and continued write-offs. Several state-owned banks also returned to profitability due to easing credit costs, but the banking sector's return on assets was low. Public sector banks (PSBs) were more vulnerable than private sector banks coming into the crisis, with weaker loss-absorption buffers, and appear to be shouldering a disproportionate share of the burden in bailing out affected sectors.

As per the report, Indian banks are likely to require at least $15 billion in fresh capital to meet a 10% weighted-average common equity tier-1 ratio under a moderate stress scenario. The amount would rise to about $58 billion in a high-stress situation where the domestic economy fails to recover from the coronavirus pandemic-related disruption. It said a well-functioning banking sector is supportive of achieving sustained economic growth of 6-7%, but without timely and adequate recapitalisation, banks will continue to display heightened risk aversion, adding to India's economic uncertainty. Meanwhile, Fitch expects the economy to contract by 5 per cent in the current financial year, followed by a recovery in 2021-22, but with considerable downside risk to its forecast.

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