Covid-19 pandemic impact will pose challenge to Indian banks in FY22: Fitch

The improving financial performance of Indian commercial banks will face a challenge from the impact of Covid-19 pandemic once asset-quality risks manifest in the next financial year (FY22), according to Fitch Ratings.

Indian banks reported lower impaired loans and improved profitability for the nine months ended December 2020 (FY21) due to various forbearance measures and continued large write-offs.

The disproportionate shock to India's informal economy and small businesses, coupled with high unemployment and declining private consumption have yet to fully manifest on bank balance sheets, the rating agency said in a statement.

Indian banks, particularly state banks, remained more risk-averse than in prior years, which was reflected in their weak credit growth.

Fitch said it expected a moderately worse sector outlook for Indian banks for 2021-2022 based on muted expectations for new business and revenue generation and deteriorating asset quality.

The government of India's less-than-adequate recapitalisation plans for its banks further underscores the risk, which will likely keep risk aversion high among banks. This would be amid continuing uncertainty about asset quality and an uneven economic recovery.

Indian banks' impaired-loans ratio declined by 130 basis points to 7.2 per cent at 9MFY21, but it is yet to factor in the majority of the pandemic stress, which is unrecognised due to judicial intervention or forbearance.

As judicial intervention (forbearance) measures unwind, Fitch expects Indian banks to reverse the improvements in asset quality and profitability. Public sector banks are more vulnerable to higher stress than private banks, which have better profitability and higher contingent reserves and capitalisation, it added.