Small businesses weak balance sheet to hit NPLs
S&P Global Ratings believes systemic risk facing banks in India is likely to remain high in the wake of the second wave of COVID-19 infections and a high proportion of weak loans.
This is even though India’s economic recovery and steps by the central bank and the government to cushion the effects of the economic crisis will continue to limit stress on the balance sheets of these banks, the rating agency said on 12 April 2021.
“We estimate the Indian banking system’s weak loans are at 11%-12% of gross loans. We forecast credit losses will decline to 2.2% of total loans in the year ending 31 March 2022, (fiscal 2022) and 1.8% in fiscal 2023, after staying elevated at an average of 2.8% in fiscals 2016-2021.
“Our expected credit costs for banks in India are in line with those for banks in other emerging countries such as China and Thailand. However, provisioning coverage in China and Thailand is much higher than in India,” it said.
Indian banks’ reported non-performing loans (NPLs) likely surged in the last quarter of fiscal 2021. A large portion of the increase will be driven by the country’s apex court’s lifting of a ruling that barred banks from classifying any defaults as nonperforming assets. Banks’ NPLs would have generally been higher by 60-170 basis points in the absence of the court ruling.
The balance sheet weakness in smaller businesses is likely to contribute to incremental NPLs for Indian banks. Service sectors such as airlines, hotels, malls, multiplexes, restaurants, and retail have seen a significant loss of revenue and profit on account of COVID-19 containment measures. Meanwhile, retail loans, especially unsecured personal loans and credit card loans, could also contribute to higher NPLs.
The government’s emergency credit guarantee scheme for new loans to small and midsize enterprises (SMEs) has supported liquidity for these cash-strapped entities. However, the solvency of SMEs is unlikely be restored entirely.
In March 2021, the government extended the period for availing the credit guarantee scheme to June 2021, and widened its scope. This would reduce stress on banks’ balance sheets.
“We expect good growth prospects for the Indian economy over the next couple of years. The economy has recovered briskly over the past several months. We forecast growth of 11% for fiscal 2022, followed by a 6.1%-6.3% increase for next couple of years,” said S&P.
The control of COVID-19 remains a key risk for the economy. New infections have spiked in recent weeks and the country is in the middle of a second pandemic wave. Some targeted lockdowns have already been implemented and more will likely be needed. The impact of broader lockdowns on the economy could be substantial, depending on their length and scope.
“We believe the speed of India’s vaccination rollout will be critical in mitigating the risk of future epidemic waves. India has one of the highest doses administered globally, at about 104 million.”
However, given the country’s large population, this is only about seven doses per 100 people, considerably lower than the per capita rate of vaccination among the leading countries in this regard.
“In our view, vaccinating a much larger proportion of the population to achieve enduring herd immunity will be vital for India’s growth prospects.”
Meanwhile, the country’s strong domestic vaccine production capacity should help alleviate supply constraints over the coming months.
“Our projections for Indian banks already factor in some of the weakness that could emerge from the new COVID-19 wave and the resultant lockdowns.”
Additionally, banks have also been building capital buffers and reserves to deal with the crunch. This should help smoothen the hit from COVID-19-related losses and pave the path for recovery.
Risks facing banks in India could reduce with stabilization of credit conditions and progress on NPL resolution. Upside risk to our assessment could emerge if credit losses start to show clear signs of declining to our expected long-term average levels.
“In such a scenario, the credit profiles of some financial institutions in India could improve. On the other hand, downside risks could emerge if the improving trend in the economy reverses and the slowdown is much more severe or prolonged than our current forecasts, or if we expect a significant increase in banks’ NPLs and credit losses,” said S&P. #banking #investment #technology /fiinews.com
