Asset quality pressure may last 2 yrs, spike banks' bad loans by 6%: Fitch

Rating agency says moratorium extension, easing of working capital loan limits

Rating agency Fitch said today that Indian Banks will see significant asset-quality challenges for at least the next two years despite regulatory measures. The impact on impaired loan ratios could be anywhere between two to six per cent, depending on the severity of stress and banks' individual risk exposures.

The latest set of measures by the Reserve Bank of India include bank include an extension of the 90-day moratorium on recognition of impaired loans to 180 days. This was in addition to several relaxations in bank lending limits, including allowing banks to fund interest on working-capital loans.

Fitch said in its report on Indian banks that these measures will put a heavy burden particularly on state-owned banks (whose balance sheets are already weak) to bail out the affected sectors. They play a quasi-policy role, considering that much of the state's recently announced stimulus measures is in the form of new loans.

The nationwide lockdown to contain the spread of coronavirus, extended for the third time (till May 31), has taken a severe toll on businesses, supply chains and individual incomes. The impact on many micro and SME sectors is structural, and a meaningful revival is unlikely even when the lockdown ends.

“We assume that both consumer demand and manufacturing are likely to remain tepid until the rising cases of coronavirus patients are brought under control. The stress is occurring across sectors, but SME and retail are likely to emerge as higher risk due to both stressed industrial activity and rising unemployment”, it added.

The impaired-loans recognition will now take longer, and the more relaxed lending norms for banks could mean rising balance-sheet risks if banks acquiesce under pressure, despite their heightened risk aversion.

State-owned banks are more at risk due to their weak earnings and limited capital buffers. They also have a much higher percentage of their loan books under moratorium than private banks at about one third, as per reported data. We expect this share to rise across banks in the next few months.

Indian banks have struggled with poor recoveries for a long time. There is a risk that banks may now extend credit to even structurally weak borrowers with dimmer recovery prospects, due to a one-year moratorium on registering fresh insolvencies amid weaker future incomes. However, delays in resolution will potentially exacerbate future losses once risks manifest over FY21 and FY22.