India's economic recovery to cut bank stress, but Covid hit to be felt: S&P

An improvement in India's macroeconomic conditions is likely to alleviate stress for the country's banking sector. However, a hit from Covid-19 pandemic is inevitable, according to "Banking Industry Country Risk Assessment: India", a report by S&P Global Ratings.

Rating agency Standard and Poor’s (S&P) in a statement said the Indian government's strong efforts to shield banks from the Covid-19 pandemic have been largely successful.

While the Indian economy is on a mend, the permanent GDP loss stemming from the brunt of the coronavirus is huge at 10 per cent.

The banking system's weak loans are estimated at 12 per cent of gross loans. Credit costs, amount set aside for bad\weak loans, should improve to 2.2 per cent of total loans in the fiscal year ended March 31, 2022, from our estimate of 2.7 per cent for fiscal 2021.

India's economic risk trend is stable. Credit risk remains very high for Indian banks. These banks hold elevated levels of stressed corporate assets and, despite new foreclosure laws, progress on their resolution has been slow.

The pandemic-induced downcycle has delayed the improvement in asset quality for Indian banks. Small and midsize enterprises (SME) have been hit hardest, followed by retail loans, especially unsecured loans, rating agency added.

Steps by the government and the Reserve Bank of India, including an emergency credit guarantee scheme for SMEs, are likely to lessen stress. The budget announcement for fiscal 2022 also includes plans to establish a "bad bank" and strengthen of the National Company Law Tribunal framework. These measures could benefit banks by ensuring that management resources are not spent on recoveries of weak assets. That said, India's challenge has always been on the execution front.

Upside to the economic risk score will emerge when the economy rebounds, SME performance show signs of stabilization, bank nonperforming assets (NPAs) get substantially resolved (or provisioned).

Credit losses showing clear signs of declining to levels materially lower than the average losses seen in the past five years would also be a supporting factor.

An economic downturn that is much more severe or prolonged than our current forecasts, or a likely significant increase in NPAs and credit losses could lead to a lower economic risk score, it said.