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Home Banking & Finance

COVID-19: Indian banks may suffer years of set back

Fiinews by Fiinews
June 30, 2020
in Banking & Finance, Economy
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Expect NPAs to a fresh high

The COVID-19 pandemic may set back the recovery of India’s banking sector by years, which could hit credit flows and, ultimately, the economy.

S&P Global Ratings expects non-performing loans in India will hit a fresh high, raising credit costs, and putting pressure on ratings. That’s according to “COVID And Indian Banks: One Step Forward, Two Steps Back,” a report published by S&P Global Ratings on 30 June 2020.

“In our base case, we expect the non-performing loans to shoot up to 13%-14% of total loans in the fiscal year ending 31 March 2021, compared with an estimated 8.5% in the previous fiscal year,” said S&P Global Ratings credit analyst Deepali Seth-Chhabria.

“Moreover, the resolution of these bad-debt situations will likely unfold slowly, which means banks may also be saddled with a huge stock of bad loans next year. We assume only about a 100 basis point improvement in nonperforming loans in fiscal 2022 (year ending March 31, 2022).”

“We believe that the effect on finance companies will be more pronounced than on banks,” added S&P Global Ratings credit analyst Geeta Chugh.

“Some finance companies lend to weaker customers and have a high reliance on wholesale funding. These companies were already facing a trust deficit since the 2018 default of Infrastructure Leasing & Financial Services. Finance companies also face accentuated liquidity risks due to the high proportion of borrowers opting for loan moratorium,” said Chugh.

After years of deterioration, asset quality in the Indian banking system had improved over the past 18 months, helped by higher write-offs, slower accretion of bad loans, and resolution of some big cases under the new bankruptcy law.

Nevertheless, Indian banks were still working through a formidable overhang of nonperforming assets when the COVID crisis struck. This largely derailed that rehabilitation process, according to the report. fiinews.com

Tags: S&P Global Ratings
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