Economic recovery to be long-drawn and uneven
The aggregate consumption and investment demand is likely to remain dull in the near term amid the continued economic uncertainty and health concerns in India, said Jitin Makkar, Head-Credit Policy, ICRA Ltd.
Weak growth impulses, both in terms of domestic and export demand, would likely be the predominant risk factor causing continued pressures on credit quality, going forward.
“Vulnerabilities of the financial sector and weak fiscal health of the Centre and State governments would add to the pressures,” said Makkar.
As such, ICRA has recently further slashed its GDP growth forecast for FY2021 to -11.0%, from -9.5% earlier.
As banks and non-banks in general face elevated asset quality pressures, and public sector banks in particular face capital constraints, credit growth is expected to fall to low single digits in FY2021 which would both be a cause and an effect of weak economic activity.
Prolonged weakness in the financial sector would likely restrict the credit quality of the real sector from improving materially, ICRA pointed out in a review of the economic environment on 1 Oct 2020.
While entities in many sectors may not see a further deterioration in credit quality as economic activity improves sequentially, the recovery period is expected to be both long as well as uneven, cautioned the agency.
Further, in sectors such as travel, tourism, hospitality, discretionary retail and recreation, improvement might be the slowest. Notwithstanding the above, some already strong entities across sectors might become even stronger in the aftermath of the ongoing crisis.
In responding to severe and extensive shifts in the operating environment, the current ICRA-assigned ratings and outlooks capture the near-term and medium-term credit risks stemming from the pandemic, as well as the mitigating effect of policy support.
“Our ratings continue to reflect our expectations for medium to longer-term performance and are not predisposed solely to the credit quality weakness being seen in the extant period, unless an entity has inadequate liquidity buffers and weak financial flexibility that warrants an immediate and a relatively sharper rating change.
“As the situation evolves, our rating reviews will continue to incorporate emerging developments and new information,” added ICRA. #economy #market #banks #financial #ratings /fiinews.com
